Beware: Plummeting share price

No one knew if John Mayo was going to attend the Marconi AGM at London’s Queen Elizabeth II conference centre on 18 July but, in case he did, the business press were lying in wait.

The problem was, hardly anyone among them knew what John Mayo looked like. Journalists clutched photocopies of his picture from their files, furiously instructing photographers to snap any ‘fat man with glasses’ on the off-chance he might be the one they wanted.

It’s probable that never before has a finance director caused such havoc in a press scrum or been the subject of so much speculation. ‘Will he show up? Will he speak?’ they wondered. A year ago, Mayo was named chief executive-designate and, in April this year, was promoted from FD-and-heir to deputy chief executive. This AGM was to have been the day the 45-year-old became chief executive, succeeding Lord (George) Simpson who, in turn, was to become chairman on the retirement of Sir Roger Hurn. Instead, 13 days earlier, Mayo had been sacked by his board colleagues.

Mayo, it seemed, was paying the price for Marconi’s profits warning and for the mishandling of the announcement. But what had widely been considered as throwing one man to the wolves in an attempt to save the skin of the chief executive ? and Simpson generously offered to remain in post for another year while a new successor was found ? became a feeding frenzy that resulted in many calls for the resignation of the rest of the board.

‘Is John Mayo here?’ asked one shareholder of Hurn as the AGM ground on. ‘I have no idea,’ the chairman replied, trying to sound nonchalant. Another commented, ‘It’s a great shame we had to lose John Mayo. I can see no good reason for it.’ Yet another said, ‘Within a year you’re going to need John Mayo ? or someone with his qualities. I feel quite sad about it. I bought my shares when I heard that he was joining this company.’

The appointment of Mayo in 1997 helped George Simpson turn the company 180 degrees away from the Weinstock era. A deal-doing merchant banker, Mayo had been poached from Warburgs by ICI to head up the demerger of Zeneca in the early 1990s, and then became FD of the pharmaceutical group. Simpson saw him as someone who could do the deals needed to revolutionise GEC.

Hitherto, the company that chief executive Weinstock insisted, accurately, on referring to as ‘The GEC’ was the kind of place where he was just a speed-dial away from hundreds of senior managers, who dreaded his phone-calls querying even the smallest diversions from budget. GEC was accused by City analysts and investors of being too cash-rich and deal-shy in the 1980s. But Weinstock refused to splurge the cash on acquisitions just because the City wanted them (or thought it wanted them).

In 1997, Weinstock’s successor Simpson announced that he would completely change the Weinstock-centric culture of control, to ‘get people really turned on and deliver results by incentives’. Acquisitions and disposals worth billions of pounds followed rapidly.

One of the most remarkable deals was the January 1999 sale of Marconi’s defence electronic systems to British Aerospace. This deal was so extraordinary that the entire Observer ‘gossip’ section in the Financial Times was devoted to Simpson, Weinstock and Mayo. ‘This is not how Arnold Weinstock ran the business,’ said John Mayo, who was described by the FT as the ‘pushy powerhouse behind many of the new ideas’. Mayo was awarded a CBE a year later ? a rare accolade for an FD.

‘Arnold doesn’t agree with everything I’m doing,’ Simpson was reported to have said in the same column. ‘But what I’ve done with the share price keeps him happy.’ At the time, the shares were on their way up through 350p.

By the following year, the share price had hit £12.50, valuing the company ? by now renamed Marconi ? at £34bn. The internet economy was in full flow and demand for telecommunications equipment was huge.

In July last year, just three months after the first prick in the Nasdaq dotcom bubble, US group Computer Associates issued a profits warning ? exactly a year before Marconi’s fateful statement. A whole string of warnings came out of the IT, internet and telecoms industry over the next 12 months, and each was worse than the last.

One of the most shocking announcements came from Cisco on 16 April this year. Having already warned that the company could not remain ‘immune’ from the downturn in the US, it then announced that it would miss an earnings forecast for the first time in years.

‘This may be the fastest any industry our size has decelerated,’ said Cisco CEO John Chambers. Cisco’s slip-up was all the more remarkable because of the company?s legendary ’24-hour close’ financial systems, which are supposed to keep managers on top of profit figures on an almost hourly basis.

Days earlier, on 10 April, Marconi had announced a reorganisation of its business, a £400m programme that was to be headed up by Mayo. The company also admitted that trading conditions, especially in the US, had experienced a ‘marked deterioration’ in the first three months of the year, but that it was confident of making analysts’ trading-profit forecasts of £800m for the year to 31 March ? with further profit growth the following year.

Similar sentiments were repeated on 17 May when Marconi duly announced operating profits of £807m ? though it would later be revealed by the Financial Times that workers in one of Marconi’s telecoms equipment factories in Liverpool had spent recent days sunbathing because there was so little work to do.

At the end of June it was apparent that Marconi could no longer rely on its ‘strong customer base’, ‘broad geographic exposure’ or ‘major optical network wins’ to see the company through 2001-02 with rising profits. An end-of-quarter uptick in sales failed to materialise ? even though there perhaps ought to have been enough evidence elsewhere that it wasn?t likely to: finance directors in client telcos everywhere were turning off the taps.

Exactly how bad things were would be determined when the ‘flash’ figures for June came through on the morning of 4 July. These, Sir Roger Hurn told the AGM, duly fell out of the computers at around 9am, and much of the rest of the day was spent analysing the data, facing up to the gut-wrenching implications and preparing the board statement to be released to the stock exchange: operating profits were now expected to halve, not grow.

This delay in facing up to the fact that there was a problem with the basket into which Marconi had placed most of its eggs was a large part of the reason for the subsequent share price collapse. As one shareholder said at the AGM, ‘If you had prepared the City four months ago, as other telecom companies were doing, the shares would not be at £1 today.’

The next day, following a much-criticised full-day share price suspension, Mayo joined his fellow directors in buying more Marconi shares as a sign of the board?s confidence that the price was too low; he bought 200,000 at 111p each. But, by the end of the day, he was confronted by Simpson and told that he would not, after all, become chief executive.

One statement at the 18 July AGM that attracted applause was the confirmation that the June proposal for a new executive share scheme ? which would halve the exercise price of the options ? would be withdrawn and not put to a shareholder vote. In making the proposals, the board had clearly been completely out of touch with investor and media sentiment. This embarrassment, coupled with the fracas over the share suspension, resulted in a promise from the board to ‘review how we communicate to shareholders’.

Marconi shares now languish at 68p, valuing the company at just £1.9bn. The cash mountain that Arnold Weinstock sat on in the 1980s would almost have been enough to buy all of Marconi today ? if, indeed, Weinstock would have been tempted by such an opportunity.

So why did Marconi seemingly hear but not listen to the warnings in the industry? There are a few clues. First, the statement issued on 10 April also said that Mayo would head up a project to improve financial systems throughout the company. It had moved on from the days of Weinstock’s print-outs and speed-dials. But Mayo had been FD since 1997, and it might be asked why the issue of further changes in this area hadn?t been addressed sooner.

Secondly, while Simpson refused at the AGM to duck responsibility for what had happened, he appeared to slightly side-step the blame. Since the appointment of Mayo as deputy chief exec last year, Simpson said he had taken ‘a bit of a back seat ? but I did not take my eye off the ball’. So did Mayo fail his first big test? Or was the division of responsibility between Simpson and Mayo not so clear cut?

Glowing tribute was paid to Mayo by both Hurn and Simpson. It is widely reported that this was the price Mayo extracted for his diplomatic absence from the AGM. But it was also made abundantly clear that Mayo’s skills as a deal-maker were not right for the current environment. This was one former FD whose lack of beancounting experience was telling against him. Instead, Simpson ? one-time FD of a division of British Leyland ? was ‘the right man to lead the company through this challenging period’. Simpson ? who made it clear that anyone who valued Marconi shares as high as £12.50 or as low as £1 had ‘rocks in his head’ ? said that the company had to be valued ‘over the course of a full business cycle’. It seems Mayo was not regarded by the board as a man capable of steering the company through an entire business cycle. So it sounds like Marconi didn?t just dump Mayo when things got tricky: they realised that they had hired the wrong man in the first place.

What we’ll never know is what would have happened if the crisis had blown up a few weeks later, by which point Mayo would have been chief exec. The Marconi board probably considers itself fortunate that it could get rid of Mayo before he took over the reins. Then again, Mayo probably considers himself fortunate not to be the chief exec who steers Marconi out of the FTSE-100.

Additional research: Tom Berry

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