Desperate days, drastic measures

Revival at Marconi part 2

Revival at Marconi part 3

On September 4 2001, a week before the terrorist attack on the World Trade Center in New York, Marconi announced that it was in deep trouble. The telecommunications equipment company hewn from GEC only two years earlier was losing cash and the flow of orders had dried up. George Simpson, its chief executive, and Sir Roger Hurn, its chairman, both resigned that day.

The new management team appointed by Derek Bonham, who had reluctantly agreed to become interim chairman, was not brought in from outside. They were insiders who were eager to fix the mess in which they were implicated. They were given the chance partly because of their links with customers and partly because there was no time to seek an alternative.

Their task was fearsome. Marconi's value had collapsed from a peak of £35bn ($64bn) to just £820m, and its bank and bond debts of £4bn were in danger of overwhelming it. Big customers such as British Telecom and Telecom Italia had heavily curtailed their orders for network equipment. "There was a burning platform," says Pavi Binning, Marconi's finance director.

Three years on, Marconi is a sadder, wiser, smaller company. In that period, it defaulted on its debts, sold many businesses and trimmed others, cut £1bn of costs from its operations and supply chain, and made 20,000 people redundant. Yet it has survived. Its original shareholders lost virtually everything, but those who invested in the company when it relisted in May 2003 have done very well.

So too have the 50 managers who pulled off the feat: they have already gained £28m in bonuses. That is not universally popular, but Michael Tory of Morgan Stanley, which advised Marconi, says that their achievement was extraordinary: "They retained their customers' confidence, rebuilt morale and kept the company operating in the cruellest environment the industry has ever seen."

Pecuniary advantage was not their only motive: they also felt responsibility for the company's woes. "If you are the captain of a ship going through a storm, you don't let go of the wheel, you grip it harder," says Neil Sutcliffe, head of human resources. "We felt that our reputations were at stake. Walking away was not an option for us."

Mike Parton, the 50-year-old chief executive who led this tight-knit group, is a quietly spoken, determined character. When asked a question, he sometimes lowers his head briefly to think before answering assertively. The team around him - including Mike Donovan, chief operating officer, Geoff Doy, sales and marketing director, Mr Sutcliffe and Mr Binning - share an affable, no-nonsense style.

Mr Parton can be ruthless, too. As Marconi edged towards the brink in late August 2001, he went to see Mr Bonham. Mr Parton, then head of the networks division, said the company's senior executives had lost confidence in Mr Simpson and wanted him to resign. They had drawn up a plan to save Marconi, and were eager to implement it.

"I felt an absolute urgency to have a fast action plan, because the one thing we did not have was the luxury of time. I knew that Mike had the full backing of the executive team, was respected in the industry, and knew the customers well," says Mr Bonham. "They had thought the whole thing through. They did not need six months of analysis."

The plan was simple: Marconi would get its debt below £3bn by selling businesses, and cut £200m from costs with redundancies and other efficiencies. It would try to refinance loans from 26 banks, extending the maturity of the debt in return for higher interest payments.

From the start, Mr Parton's team took a structured approach. It divided the task of reducing manufacturing costs among 30 executives, giving them individual targets. "We drove each project against very tight goals. We had a weekly drumbeat of reviews, like an army on the march," says Mr Donovan. Every 90 days, the senior managers reviewed progress and set new targets.

Meanwhile, Mr Parton tried to reassure the customers. The 10 biggest clients account for 50 per cent of its sales and it was vital to retain their loyalty. "The big worry I had was the customers. If they had lost confidence, there there would have been a domino effect. I did not think the business would go under, but I knew that it could at any moment," he says.

Again, the approach was highly structured. Mr Doy prepared a list of 100 senior executives in 20 telecoms companies, and designated a Marconi manager to keep in touch with each one. "It was not a time to try to be cute: we were . . . pretty open and honest. We kept saying what we were going to do, and coming back to show we'd done it," he says.

Meanwhile, the company was paring down its operations. It put some - including a petrol pump manufacturer and a printer business - up for sale, aiming to raise £500m within six months. Despite the fact that the stock market was depressed, these sales went smoothly. Combined with the earlier sale of its medical division, Marconi amassed a cash pile of £1.2bn.

With all this activity in progress, the mood within the group started to lighten by early 2002. Steve Hare, then the finance director, was close to agreeing a refinancing deal with banks, and cost targets were being hit. But the telecoms equipment market was slipping away faster than Marconi could restructure, and rivals such as Nortel and Lucent were also in trouble.

"I remember Mike and Steve coming in to say 'the order book is deteriorating and we cannot deliver the business plan'," says Mr Bonham. "We did not know where the bottom was and it was clear the management could not give the board the assurances it needed to sign the refinancing." The board instead decided that it needed a debt write-off.

"The minute you do that, you recognise that the equity has gone. It is like a house that goes into negative equity. It is still a good house, but the person who used to own it does not any more," says Mr Parton. Marconi's 200,000 shareholders - many of them small investors who had bought shares in the old GEC - had in effect been wiped out.

The decision also meant the company's banks had potentially lost up to £2bn. The announcement went out on the morning of March 22, just as bankers were gathering in the City of London to sign the refinancing deal. Many of them had spent the past six months negotiating it, and had placed their own credibility on the line.

"It was one of the most extraordinary meetings I have ever attended," says an adviser. "People were apoplectic, outraged that Marconi could have done it to them." The bankers insisted that the company put its loans on demand, allowing them to pull the plug at any time. Six months after Mr Parton's team had taken charge, Marconi was back on the financial brink.

Dream team’s error that led to Marconi’s fall

They were billed as the “winning team”, the ideal partnership to run Marconi, the focused telecommunications group that had emerged from the industrial conglomerate GEC. But the collapse of the group shattered the reputations of both George Simpson, its chief executive, and John Mayo, his deputy, writes Ben Hunt.

Before the summer of 2001, they seemed to have perfectly complementary talents. Lord Simpson was one of the most respected industrialists of his generation - a hugely experienced manager who provided a cautious check to the ambitious and cerebral Mr Mayo.

When Marconi issued a profit warning in July 2001, the winning team was two weeks away from consolidating their success. Mr Mayo, a Warburg banker-turned-pharmaceutical executive, was scheduled to move into Lord Simpson’s chief executive’s office in the group’s Mayfair headquarters in London, while the peer was due to take over from Sir Roger Hurn as chairman.

Mr Mayo was the first to be sacrificed to shareholders’ anger. Lord Simpson and Sir Roger vowed to see Marconi through its difficulties, but only survived until September; since then they have kept a low profile.

It was at the end of the 1990s that Lord Simpson and Mr Mayo made the decision to focus GEC on its communications activities. They shed the defence interests of the company, dominated from 1963 to 1996 by Arnold Weinstock, demerging them in a deal with British Aerospace in January 1999. They then hit the acquisition trail at the height of the internet boom, buying Reltec, a US telecoms company, and Fore Systems, an internet switching company.

They made a fateful error in buying the companies with cash and debt, rather than using GEC’s highly valued paper. “John was an incurable optimist, and he did not see why he should issue shares at £6 when he thought they were bound to go to £20,” says one adviser. As a result, Marconi entered the downturn with a heavy burden of debt.

That put them in the opposite position to GEC under Lord Weinstock. While he was in charge, Lord Weinstock was criticised by investors for the company’s lack of focus and his insistence on retaining a cash pile. Lord Simpson’s moves to focus the company on telecoms were initially greeted with investor enthusiasm.

But GEC’s role at the heart of post-war British industry increased the sense of shock when his strategy unravelled. “This was probably going to sink if we could not save it, and a lot of people felt it would be a terrible shame to lose the name, the technical position and the heritage. This was the last piece of GEC,” says John Devaney, Marconi’s current chairman.

Lord Simpson remains on the fringes of the business world. Until this year he had three non-executive directorships, but resigned from the board of Nestlé this year. His term on the board of Alstom, the engineering group, also ends in 2004. That leaves a directorship at Triumph Group, a Pennsylvania-based aerospace concern.

A former employee says Lord Simpson was already preparing to ease back his business commitments before the Marconi fiasco. Clues as to how he fills his days can be found in Who’s Who, where he lists five golf clubs, including the prestigious Royal Birkdale and Gleneagles.

Mr Mayo did not go as quietly as Lord Simpson. He has discussed the collapse of Marconi at length - not least in a series of articles published by the Financial Times in early 2002 - but disappeared from public view in April 2003 after he was cleared by the Financial Services Authority of blame for the share suspension that preceded Marconi’s first profits warning.

Unlike his colleagues, he did not head for semi-retirement. He says: “[I would have been] bored sitting at home with my feet up. Besides, I was too young for it. If the roles were reversed and I was in my 60s and they were in their 40s then maybe I would have retired. I cannot imagine that I would not want to be working. I was trained at Warburg and they have a strong work ethic, which I still have.”

As soon as the FSA report absolved him Mr Mayo set about relaunching his career. “The day after the FSA released its conclusions I received approval from them for setting up an advisory business,” he says. It is a return to his banking roots for Mr Mayo whose boutique, The Strategic Financial Advice Company, helps technology companies raise money.

He is happy to be out of the public eye, and working for himself. “I am working at about the same level as I was before, but in your own business you are more in control of things. With a large group you never are, and certainly not with Marconi.” He insists that the Marconi affair has not hindered his business, but broadened his experience.

Meanwhile, Marconi still operates in the sector that Mr Mayo and Lord Simpson chose. “The core of the Simpson strategy has survived,” says John Devaney. “The old GEC could have become a number of things. It could have been in defence, or even the world’s biggest producer of petrol pumps. But they chose telecoms in the white hot time, and we can live with that.”

MARCONI’S SYSTEMATIC AND METICULOUS APPROACH

• Teamwork. A small group of senior executives worked closely together on a plan to revive the company. They had detailed ideas for how to cut staff and other costs, restructure the company’s finances, focus the company on a few key products and maintain customers’ confidence.

• Project management. Each task was carefully planned and targets were set for what had to be achieved over a set period. The work was divided among a network of managers, all of whom were given individual responsibilities for which they had to answer to the wider group.

• Communication. The company’s senior managers explained to investors, staff and key customers exactly what they intended to do, the difficulties they faced, and the milestones they intended to hit. They reported on progress regularly to minimise uncertainty.

• Negotiation. Marconi eventually made 20,000 people redundant across global operations in Italy, Germany, the UK and the US. They had clear procedures for deciding who left, offered retraining and counselling, and convinced unions not to stand in the way of what they had to do.

• Customer focus. They enlisted the help of their biggest customers to decide which products they needed to invest in, and which should be dropped. The telecoms operators could tell them about their likely needs in the future, although they were not making immediate investments.

• Preserving the core. The company continued to invest heavily in research and development to find products that it believed customers would eventually start to buy again. They prepared Marconi for the upturn in the telecoms market, despite the short-term costs that this implied.

• Analysis. The managers worked with Marconi’s suppliers and its engineers to raise operating margins. This involved not just cutting costs, but finding ways to innovate while keeping product costs steady. It encouraged suppliers to move production facilities to countries in Asia and eastern Europe.

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