EXTENDED CASE STUDY 6

The rise and fall of Marconi

Background
There can be few who are not aware of the spectacular crash of Marconi, which, in the
space of two years, went from a share value of 12.50 to under 2p, a stock market
valuation of 5bn to !ust a few million pounds, and a profit of "50m to a loss of
some 5.#bn, one of the bi$$est in %& corporate history.
Marconi $rew out of '(), the $iant industrial con$lomerate built by *rnold
+einstock. ,n a period when the %&-s industrial competitiveness, and its base,
declined, '() was one of the %&-s leadin$ and most successful industrial enterprises.
+einstock, who died in 2002 at the a$e of "", created '() and was the %&-s leadin$
industrialist for over 0 years.
+einstock $raduated from the .ondon /chool of (conomics in 1011. 2e worked
for the admiralty for three years before movin$ into property development. ,n 1051,
he !oined his father3in3law-s firm, 4adio and *llied ,ndustries, where he built a stron$
reputation for his mana$erial abilities. ,n 10#1, the firm made a reverse takeover of
the lar$er but stru$$lin$ '(). +einstock became '()-s Mana$in$ 5irector, a post
he held for over 0 years until he retired in 100#. ,n his period as Mana$in$ 5irector,
he turned '() into one of the $reat 6ritish success stories, throu$h a combination of
ac7uisition and or$anic $rowth. ,n 10#1, '() took over *(,, and in 10#8 they
bou$ht (n$lish (lectric, the owners of Marconi. '()-s ac7uisitions continued into
the 10"0s and 1080s. %nder +einstock, '() ac7uired a portfolio of solid, well3
re$arded and profitable companies, includin$ 2otpoint, *very, Metropolitan 9ickers,
1
:arrow /hipbuilders and Marconi. '()-s last purchase under +einstock was the
9/(. shipyard at ;arrow, reflectin$ its commitment to maintainin$ the stren$th of its
defence businesses, which accounted for some 50 per cent of sales and profits.
+einstock had a knack for runnin$ businesses profitably where others had failed.
This was down to his famously intimidatin$ mana$ement style, which produced
profits and, in the early years at least, $ained him much praise from financial markets.
<or their time, his methods were revolutionary, at least in the %&. 2e was le$endary
for ti$ht control of cash and focus on financial measures. 2e moved cash out of the
separate '() businesses and held it in the centre. 2e drove and monitored each
business on their financial performance. 6ud$ets became key $rowth mechanisms that
put mana$ers under enormous pressure to deliver on their forecasts. 6y ruthlessly
cuttin$ out overheads, introducin$ ti$ht financial controls and forcin$ mana$ers to
think intelli$ently about their businesses, '() $rew in si=e and increased shareholder
value.
Throu$hout his period in char$e, '() profits $rew. ,ndeed, in 1000 >1002, when
the %& economy was under$oin$ one of its worst recessions, '() broke the 1bn
profit barrier. 5espite this, however, in the 1000s, '() and particularly +einstock
became increasin$ly unpopular with investors in the )ity of .ondon. '() was a
massive, sprawlin$ industrial con$lomerate when these were hu$ely unfashionable.
5riven by academics and consultants such as Tom ?eters and 4osabeth Moss &anter,
and break3up specialists such as .ord 2anson, mana$ers were told that they had to
identify their core business, @stick to the knittin$- and sell off non3core activities to
release shareholder value. This went a$ainst +einstock-s business philosophy. 2e was
not particularly interested in whether there was syner$y between the various '()
businesses. ,n '(), he had created a company composed of businesses that were
2
leaders in their fields, made steady and consistent profits and which were, to an
eAtent, insulated from wilder economic fluctuations. ,t was anathema to him to sell a
business that had a profitable future or to buy one that was overpriced or unlikely to
perform. ,n the early 1000s, he looked at many companies, but bou$ht few. This
approach did not please the markets, which seemed enamoured of companies that
sold, spent and borrowed. 2owever, the performance of the companies he turned
down appeared to !ustify +einstock-s parsimonious approach BCwen, 2002D. ,t also
enabled the company to build up a cash stockpile of over 2bn, but stran$ely enou$h,
this also attracted criticism.
Two of the )ity of .ondon-s main ways of makin$ money are to lend it or to
char$e for their services in mer$ers and takeovers. '()-s stockpile of cash meant it
did not need to borrow money, and +einstock-s insistence that he would not buy
companies that were either overpriced or did not fit into '()-s portfolio appeared to
enra$e the )ity money men. There was also a common view in the )ity that '() had
missed the hi$h3tech boat and that it was stuck in the @old economy- when the smart
money was movin$ into the @new economy-. )ertainly, as 2eller B2002D commented,
there was a downside to +einstock-s tou$h financial, risk3averse re$ime in that it
appeared to discoura$e inter3company workin$ in the '() empire. Thou$h '() had
a toehold, and sometimes a lot more, in the various technolo$ies and markets that
would allow companies such as Eokia, ,ntel and 5ell to become $iants of the ,nternet
era, it never 7uite mana$ed to link them to$ether or develop them enou$h to establish
itself in the new economy.
2avin$ passed the a$e of "0, +einstock was finally pressured into resi$nin$ as
'()-s Mana$in$ 5irector in 100# and became its ?resident (meritus. %nder
pressure, he recruited 'eor$e /impson as a replacement. 2owever, he saw this as an

interim measure until his son /imon was ready to take over. /imon +einstock-s
sudden death in late 100# chan$ed these plans and 'eor$e /impson became
undisputed head of '(). /impson had run and sold both 4over and .ucas, was much
admired in the )ity of .ondon, and was considered to have the entrepreneurial
7ualities needed to reinvi$orate '().
+hatever criticisms there were of +einstock in his later years, his le$acy was
hu$e. Eot only had he built an enormously successful industrial con$lomerate in a
period when 6ritish industry was in decline but also, as 6rummer B2002F 1D
commentedF
The fact that 6ritain is still a leadin$ player in the $lobal power industry, and has a world3class
research3based defence industry, can lar$ely be attributed to his precocious skills.
The rise and fall of Marconi
/impson bou$ht into the popular view that '() needed to $et out of the old
economy, characterised by its involvement in defence and heavy en$ineerin$, and into
the new, hi$h3tech world of telecoms and the ,nternet. 2e believed it also needed to
stop bein$ a %&G(uropean company and become a $lobal player. *s he later saidF
+hat else were we $oin$ to doH The old '() had had it and everyone told us that focus was what was
needed. Telecoms was the obvious industry to eApand into. B7uoted in 2arrison, M, 2002F 21D
2e be$an to brin$ in his own people, notably ;ohn Mayo as <inance 5irector.
Mayo had been an investment banker before movin$ to Ieneca as <inance 5irector,
from where he was recruited by /impson. ,t was /impson and Mayo who charted
'()-s push into the new dotcom economy throu$h a whirlwind series of sales and
ac7uisitions. The crucial period was 1000 to 2001. ,n 1000, '() divested itself of its
defence business to 6*e. This halved the si=e of '() and sold off its most
1
consistently profitable elements. To mark this momentous step, '() was renamed
Marconi to si$nal its intention to become a leadin$ telecoms company, and be$an a
process of ac7uirin$ new businesses in the then $rowin$ international market for
hi$h3capacity telecoms networks. /impson and Mayo believed, like many more, that
the future lay with dotcom companies, and they wanted a bi$ share of it. Eot only did
they spend the proceeds from sellin$ businesses they did not want and the money that
+einstock be7ueathed them, but they borrowed over 1bn as well. ,n the three years
up to the middle of 2001, they sold off almost all of Marconi-s non3telecoms business,
i.e. the vast ma!ority of the old '(), and purchased over 20 telecoms businesses, for
prices ran$in$ from a few hundred million to a few billion pounds. Mayo stated thatF
The common theme between our JnewK core businesses is the ability to securely capture, mana$e and
communicate enormous amounts of data. The @data wave- is turnin$ into a tidal wave and we have
positioned ourselves to ride the wave. B7uoted in 'ow, 1000cF 25D
*t another time, the speed of Marconi-s transformation into a rapidly3$rowin$
telecoms e7uipment provider mi$ht have been a cause for concern. 6ut this was
takin$ place at the hei$ht of the dotcom bubble. ,t seemed that everyone wanted to
have a slice of the telecomsG,nternet cake and was not too concerned how much they
paid. 4ather than worryin$ the financial markets, Marconi-s splur$e of buyin$, sellin$
and borrowin$ seemed to please them enormously. The share price soared to 12.50
and Marconi were the darlin$s of the financial markets. 2owever, this was short3
lived. 6y late 2000, whilst /impson and Mayo were still issuin$ optimistic forecasts
of what was to come, other telecoms companies such as Eortel, *lcatel, Eokia and
(ricsson be$an issuin$ sales and profit warnin$s as the telecoms recession, and the
dotcom collapse, be$an to bite. *lmost to the last, Marconi denied there were any
5
problems, but in ;uly 2001 it asked for its shares to be suspended ahead of a profits
warnin$, a hi$hly unusual move for a <T/( 100 company.
Thou$h Marconi-s profits warnin$ was clearly $oin$ to dama$e the company-s
standin$, the lateness and severity of the warnin$ led to a disastrous fall in the share
price, a rapid eAit from the 6oard of senior staff and the virtual destruction of the
company. ,ndeed, such was the concern for the way the 6oard handled the profits
warnin$ that the %&-s financial watchdo$, the <inancial /ervices *uthority B</*D,
conducted a len$thy investi$ation into it. ,ts report was issued in *pril 200. The </*
pointed out that the company had a le$al obli$ation to keep the market informed of
price3sensitive information in a timely manner, and that, in this instance it had not,
and had therefore broken the </*-s rules. Treanor and +ray B200D reconstructed the
events leadin$ up to and !ust after the profits warnin$F
17 Ma !""1 Marconi says the first siA months of 2001 are unlikely to show an
improvement on the previous year-s fi$ures.
1! #une Tradin$ fi$ures show a 10 per cent decline for *pril and May. Eo
public statement is made.
!1 #une *ccounts for *pril and May show a loss of 180m, 15#m more than
the previous year. Eo public statement is made.
!6 #une The financial forecast for the siA months to /eptember 2001 show a
loss of 1"m, as averse to the 20m profits that analysts had
predicted. The forecast also shows that profits for the year to March
2002 will be 101m as a$ainst the predicted 80"m. The 6oard
disputes these fi$ures and asks for them to be recalculated. Eo public
statement is made.
!$ #une * 6oard meetin$ is called for ;uly 1.
#
%" #une The revised financial forecasts are even worse than those presented to
the 6oard on ;une 2#. <ull3year profits are pro!ected to be only 2"2m,
and half3year losses have risen to 121m. Eo public statement is made.
& #ul *t ".10 am, Marconi asks for its shares to be suspended pendin$ a
meetin$ of the 6oard at 1 pm. *t #.11 pm, the 6oard issues a statement
sayin$ that profits are likely to halve, with sales down 15 per cent.
' #ul +hen the markets open, Marconi-s shares fall by nearly 50 per cent.
;ohn Mayo tells investors that business will recover in 2002 when the
telecom networks @will be runnin$ so hot they-ll fall over- and that
there will be no chan$e in Marconi-s mana$ement. Marconi-s share
price continues to collapse. *t 0.10 pm ;ohn Mayo resi$ns.
Two months later, 'eor$e /impson also resi$ned. 6oth men received substantial
payoffs. *s a .eader in the Financial Times B200F 20D stated, @we can only speculate
whether more could have been saved had directors been 7uicker to acknowled$e that
their headlon$ rush into telecoms oblivion was flawed.- 4e$ardless of this, the events
of ;une and ;uly meant that, for Marconi, the dotcom bubble had burst with a
ven$eance. <rom then on, it was downhill all the way. ,n May 2002, Marconi
announced one of the bi$$est yearly losses in %& corporate historyF some 5.#bn. ,ts
share price plun$ed to below 2p Bdown from 12.50 at its hei$htD, makin$ the
company in effect bankrupt and its shares worthless. ,t then be$an a lon$ process of
tryin$ to stay alive by ne$otiatin$ with its creditors. ,n May 200, Marconi finally
a$reed a debt restructurin$ deal with its creditors. ,n return for writin$ off over 00 per
cent of the approAimately 1.5bn they were owed, Marconi-s creditors received 00.5
per cent of the company-s e7uity. The refinanced company would be valued at !ust
over #00m. The previous shareholders would own !ust 0.5 per cent, thus reducin$ the
"
value of their holdin$ to m from 5bn at its peak, always assumin$ that anyone
would want to buy the shares.
Su((ar
/impson and Mayo ar$ued that they were takin$ '() throu$h a much overdue
reinvention. 2owever, there is a world of difference between reinventin$ a company
around its core business and spendin$ billions to construct a new one from scratch.
+hat /impson and Mayo did was to sell off most of what was '() and to use the
money from the sale, and much more besides, to create a new telecoms company that
could rival established companies such as *lcatel, /iemens and .ucent. %nfortunately
for them, their vision of creatin$ a leadin$ telecoms company came at a time when the
dotcom bubble was about to burst. They made one of the classic business mistakes >
they bou$ht at the top. ,n the space of three years they bou$ht some two do=en
companies for billions of pounds that very 7uickly became almost worthless as their
markets collapsed. The %/ company <ore ,ndustries is a prime eAample of this.
Marconi bou$ht the company for 2.8bn in 1000. ,n 2002, a financial analyst
commented thatF @The business has very little value. ,f Marconi tried to dispose of it,
there may even be costs associated with it- B7uoted in 2irst, 2002F 1D. Marconi was
brou$ht low by the combination of massive overcapacity in the industry, a worldwide
economic slowdown and the enormous financial drain on telecom operators of payin$
for third3$eneration mobile phone licences. This led Marconi-s customers, especially
its bi$$est customer, 6T, to cut their purchasin$ of telecoms e7uipment 7uickly and
sava$ely. ,n effect, Marconi-s market collapsed.
/impson and Mayo also made another key mistake. Eeither had much eAperience
of the telecoms industry. /impson had made his reputation on runnin$, and sellin$,
8
4over and .ucas, both firmly established in the @old economy-. Mayo was an
investment banker turned finance director. They were both deal3makers with little
eAperience of the telecoms industry. *s +einstock commented, @They knew nothin$
about the business they were in, and nothin$ about the businesses they were buyin$-
B7uoted in *ris, 2002F 8D.
,t is difficult to eAa$$erate the disaster that happened at Marconi. +hatever the
criticisms of the old '(), when +einstock handed over power in 100#, it was a
stron$ and profitable company. The parts that were sold off by /impson and Mayo
still appear profitable. Cn the other hand, by 2002, the new Marconi was bankrupt and
worthless. +hen he stepped down, +einstock was the bi$$est private investor in
'(), with some 15 million shares valued at over 100m. *t the time of his death in
2002, these were practically worthless. /impson and Mayo, who were both forced out,
received handsome payoffs, and appeared not to accept that they bore any personal
responsibility for the Marconi debacle, preferrin$ to cite bad luck, poor timin$ and
other people for the collapse of Marconi B2arrison, M, 2002L 2irst, 2002D. 2ardly
surprisin$, therefore, that +einstock commentedF @,-d like to strin$ them up from a
hi$h tree and let them swin$ there for a lon$ time- B7uoted in *ris, 2002F 8D.
0