COVER STORY: Marconi
In an exclusive interview, Mike Surrey, operations and group controller of Marconi, talks about the pain of the company's downfall, gives an insight into its restructuring and hints at the challenges ahead.
After a tortuous restructuring a new era has finally begun at the coventry telecoms firm under its new listing as marconi corporation. OPERATIONS AND GROUP CONTROLLER Mike Surrey spoke exclusively to Jim Pendrill about its past, present and future.
Well, that time with Marconi is probably now.
Few companies have occupied quite as many column inches as the fallen telecoms giant in the past couple of years. But for every story that has valiantly tried to explain the company's extraordinary collapse against the backdrop of a frenetic and fast-moving telecommunications industry, another has misguidedly thrown in the Marconi name in the context of yet another bland piece about the bursting of the internet bubble.
The truth is that although on the face of it Marconi's collapse is quite easy to explain (too much debt that it could never hope of repaying), there are many other complex reasons for its downfall.
But now in the somewhat clearer light of summer 2003, two years after that bubble was pricked, what happened to the UK's telecoms industry at the turn of the century is beginning to make slightly more sense.
People who were inside that maelstrom are beginning to come out and talk about it and help us understand it, now that they have either sorted out major restructurings or outright sales of their companies.
In fact the very day I meet one such character, namely Marconi's operations and group controller Mike Surrey, the radio on my drive to meet him at The Belfry golf course (where he is later addressing the Midlands Technology Club forum) is full of the latest news of the restructuring of another cause cx8elx8fbre, namely Cable and Wireless. In particular I hear a senior executive of C&W talk about precisely the same things that Surrey himself would repeat to me later, how everyone forgets today just what the market was really like three years ago.
Surrey, who reports direct to Marconi's three executive board directors and is in charge of explaining operationally what is happening across the entire business, reminds me as he coolly pours himself a mineral water: "What people forget is the frenetic pace at which everything was happening at the time. Everyone believed we were following the correct strategy. We were the darling of the stock market. We were worth £335bn, our shares went up to £312.50. Everyone felt it was the correct way to go."
Surrey talks with a calmness that belies what he has personally been through during the past two years. Still just 36, Surrey has worked for Marconi for 11 years ever since the accountant did an audit of the company and ended up staying - the "classic way in" as he puts it.
His rise was heady. By 1998 he was heading up Marconi's global services business out of Coventry, which would soon be turning over £31bn plus as it found itself in the thick of the company's catastrophic spending spree. Despite what would follow, Surrey remembers those heady days with pleasure. "I had always been involved on the telecoms side of the old GEC and it had been great to see the telecoms bit of the business brought to the fore and invested in. We were all putting immense time, energy and emotional commitment into the business. Everyone saw the market growing and everyone believed in it."
But very few would see what was coming. What followed is the stuff of legends. The company would famously run up billions of pounds of debt in its acquisition spree, and even more famously pay for its goods in cash rather than shares. When everyone realised that everyone else's growth forecasts for demand for bandwidth were wildly inflated, sales collapsed and Marconi found itself unable to repay its debts.
Delays in telling the City the true extent of the company's problems only exacerbated its demise.
On a personal level the collapse affected Surrey no less than the next man. "A lot of companies I bought were sold. A lot of people I took on lost their jobs. From that point of view it has been a tough and sobering experience."
But how did Surrey keep his job? For the same reasons as insider Mike Parton was given the top job following the boardroom shake-out. Namely both men had a deep and thorough understanding of all aspects of the business, no matter how technical.
Surrey adds: "I have a deep knowledge of the organisation and that has been extremely valuable when working on the debt restructuring."
It is no understatement either when Surrey describes that debt for cash/loans/shares restructuring, which has taken a whole year to thrash out and which handed control of the company to banks and bondholders ahead of the company's relisting as Marconi Corporation, as "one
of the most complex restructurings in British corporate history".
"At times it was very hard to see the end of the restructuring road. When we started we thought we were on track to get something sorted out in months, not years. In fact there were a number of occasions when we reached heads of terms only for things to fall down again and for us to go through more legal hoops.
"The complexity was beyond what anyone had done before and yet there was no precedent for the deal we were doing. We were all finding our way because there was no textbook to read. There were some extremely complex issues about overseas assets, levels of cash we held and how the distribution would be made."
Not surprisingly the deal received a bad press in some quarters for leaving lifetime shareholder Mrs Smith of Dorset (inevitably) at the back of the queue.
But Surrey is brutally upfront on the issue. "As a shareholder in any business you carry the greatest risk for the greatest return.
"However it is a very different story for our former employees who built up shareholdings in the company and I accept that is particularly sad."
The relisting of the company as Marconi Corporation on May 19 was inevitably of hugely symbolic value, and Surrey clearly sees it as a new beginning for everyone concerned - the City, shareholders, suppliers, customers (and the press).
Reaction has so far been positive. Some 13 per cent of its shares were traded on the first day and the company has even received a positive note from Per Lindberg, the very analyst with Dresdner Kleinwort Wassertein who famously was the first to suggest two years ago that Marconi's equity was effectively worthless. He now believes that the new Marconi is a "viable enterprise" and is forecasting shares trading at 100p by the end of the year. Surrey allows himself a wry smile given the irony of the forecaster's altered view, but knows full well that such reports can carry enormous influence in the City.
"What it shows is that there is fundamentally a good, sustainable business here. There was a question mark about what form of business would come out the other side of the restructuring. But now we don't have the burden of debt and we have a new capital structure in place we can begin to be valued in a more conventional sense again.
"Also, what management has shown in the last two years is that it is prepared to take the right decisions to keep this business going, such as by taking tough cost-cutting decisions."
That cost-cutting continues as we speak in what remains a terrifically tough market. Earlier this summer Marconi Corporation revealed plans to cut another 500 jobs as it forecast further falls in volumes and sales this year due to significantly lower levels of capital expenditure by public telecoms network operators around the world.
Marconi said its total workforce would fall to 13,000 by the end of March next year, a far cry from the 57,000 it employed at the height of the boom. Of that 13,000 figure just over a third will still be employed in the UK.
At the time of the announcement the company warned that sales in the first quarter to June 2003 would fall below £3400m. Sales in the three months to March 2003 were £3426m. However despite falling sales the company improved margins and made further cost savings in the year to March 31. Pre-tax losses were cut to £31.3bn from £35.9bn in 2002.
The continued pressure on accounts is hardly surprising given the pressure on Marconi's own customers. "If you look at the telecoms industry every major player is going through restructuring and many of our customers are suffering from their own debt problems," adds Surrey.
"But there is a community interest to make sustainable businesses continue in the sector." And, as Surrey proudly states, "We haven't lost a single customer despite everything."
My initial surprise at this revelation is tempered when Surrey also reminds me (and it is something he clearly wants to remind everyone else too) that the old GEC business has far from disappeared.
"People will flippantly say that the GEC legacy has all gone. People forget though that a large chunk of it went to BAE Systems and is still there."
So what does the new lean, mean Marconi Corporation (MC) mean for its Midlands heartland?
Well, if anything the region looks set to benefit more than most from a revived Marconi. Surrey insists that the company is now making more of a commitment to the region. Its New Century Park headquarters in Coventry remains the company's largest UK site employing up to 2,000 people and is home to its R&D centre, as well as the commercial finance, sales and marketing functions, with many head office functions now transferred from London as part of the cost cutting drive.
The Midlands professional services sector has also benefited with Marconi's audit by Deloitte & Touche moving from London to the Midlands.
Meanwhile the picture at the company's other Midlands base in Nottingham is less clear with some of the recent job cuts going from there. However, Surrey insists that it has a future along with Coventry.
"These are two centres we have had for many years and which we will continue to have."
Surrey backs up the comment with the observation that both Nottingham and Coventry are cities where the company can successfully recruit quality engineers.
"The Midlands unfairly gets tarnished with this metal-bashing badge. The truth is that we have a highly skilled workforce operating at the leading edge of technology. People can forget that."
But the future is still unclear over Marconi's much-vaunted plans for a research and development campus at Ansty, first revealed by then trade secretary Stephen Byers three years ago. The campus was to have occupied a 120-acre site close to the M6 and created 2,200 new hi-tech jobs. Surrey says no firm decision has yet been taken on the plans and is reluctant to comment further.
Turning to future business growth Surrey says BT (which currently accounts for 15-20 per cent of MC's business) is likely to remain the biggest customer of Marconi's core transmission network technology and its switching and access technology. The importance of the relationship was evidenced last month when Marconi admitted that its core optical networks business had suffered as BT had cut its spending.
But when I suggest that a resurgent BT under its new chief executive Ben Verwaayen is surely good news for Marconi (just look at its success in reaching broadband targets), Surrey nods furiously.
Ever more wireless technology and consumer take-up is good news too. "The more mobile traffic the more pressure there is on the networks which can only benefit us. All that traffic still needs to be switched and go through transmission networks. We are all making ever more use of telecoms and data networks."
As regards future growth, the emphasis is clearly on new products and services rather than any acquisition spree too. Surrey insists that the UK remains its core market, and when I broach the subject of anymore overseas expansion I get a stony look. Given Marconi's disastrous foray abroad in the late 90s this is hardly surprising and the pain is clearly still deep among top management. Most analysts (including Lindberg) expect Marconi to pull the plug on most of its US operations as well as on loss-making businesses elsewhere.
"You have to take a rational view of what needs to be done," adds Surrey. "You can look backwards and have an opinion about the past and learn from it but none of that is relevant to today.
"We are still a large company employing lots of people in the Midlands. There are a lot of challenges ahead but if you get stuck in the blame culture you are only going to grind the company down. We have to look forward."
TROUBLE AHEAD
The restructuring may now be complete but a glance at the figures shows that Marconi still faces huge challenges
For an indicator of the pressure Marconi is still under, consider the fact that the company experienced consecutive single-digit sales declines, quarter on quarter, throughout last year as cash-strapped telecom groups continued to cut back their spending.
Previous forecasts that suggested £31.7bn of sales in the current financial year have now been abandoned with sales expecting to fall to £3400m in the first quarter of this financial year. Last year total sales were £31.8bn, down 32pc compared with the previous financial year. The company has now lowered its break-even sales level for the year to £31.5bn. The reststructuring left Marconi with net assets of £3400m.
While the financial restructuring is now complete the business restructuring continues - management expects £3490m will be needed for restructuring costs this year. For instance it says its workforce will fall to 13,000 by the end of March 2004.
Morgan Stanley expects Marconi to report an operating loss of £351m this year and an operating profit of £333m in 2004-05. But after a net interest charge of £370m in 2004-05, the latter will translate into an adjusted pre-tax loss of £337m.
IT ALL STARTED HERE...
1895 Guglielmo Marconi begins laboratory experiments at his father's country estate at Pontecchio, Italy, and succeeds in sending wireless signals over a distance of one and a half miles.
1896 Marconi takes his apparatus to England and is granted the world's first patent system for a system of wireless telegraphy. He founds the Wireless Telegraph Company.
1931 Marconi's research leads to the opening of the world's first microwave radiotelephone link in the Vatican City
1968 GEC buys Marconi following GEC's merger with Marconi's parent company English Electric
1996 Lord Simpson, former head of British aerospace firm Lucas Industries, replaces Lord Weinstock as GEC chief executive.
1998 GEC begins making global acquisitions to support its new focus on communications networks.
1999 GEC combined RELTEC and related operations with Italy-based subsidiary Marconi SpA under the name Marconi Communications. GEC changes its name to Marconi to further emphasise its focus on communications.
July 4 2001 Marconi suspends trading in its shares to prevent investors making decisions based on the sale of its medical systems business while still ignorant of a pending profits warning
July 5 2001 After the profits warning emerges Marconi's shares halve in value and never recover.
September 2001 Chairman Lord Simpson and chief executive John Mayo leave the company and Marconi begins restructuring under helm of new chief executive Mike Parton.
May 2003 Company relists as Marconi Corporation following the completion of a debt for cash/loans/shares restructuring.
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