Oracle aided Marconi collapse
Reporting software saw nothing coming
Last week, the once powerful Marconi (formerly GEC) suffered a humiliating share collapse following an unexpected profit warning. The company's operating profit has been jumping each year from 1997 as CEO Lord Simpson turned it from a large lumbering giant into a lean, mean telecoms machine.
However, on 5 July - having suspended its shares for a whole day (most unusual) - it told the City that profits would be down 50 per cent. Furious investors frantically sold their shares, causing the share price to drop 54 per cent in one day. The ensuing fall-out saw shares drop even further, the deputy CEO and soon-to-be CEO John Mayo removed and Lord Simpson's credibility smashed.
Tomorrow, investors and shareholders will have their first meeting with the Marconi board and they will demand answers. The board will tell them that the big drop in demand that has hit all telecoms equipment companies surprised the company and resulted in the profit warning. Investors will question how on earth the board didn't see it coming - after all both Lord Simpson and John Mayo are accountants by profession. (They will also be livid at the board's attempts to award itself bonuses it doesn't deserve by lowering the share price at which they kick in - from a hefty £16 a share to just £4 a share. The share price rests at just over £1 at the moment.)
And that is the multi-billion dollar question: how and why didn't the board see that profits were slumping? It's fair to assume they didn't, or they would have made the information known long before 5 July.
Well, thanks to people within Marconi, we can tell you precisely what went wrong and why. It all comes down to the company's many acquisitions, a lack of effort at board level to find out what was going on and the failure of Oracle reporting software to keep up with the change.
Soon after Lord Simpson took charge, he embarked on a huge selling and acquiring spree. In March 1999, he acquired Reltec for $2.1 billion. In April 1999, Fore Systems for $4.5 billion (in cash). At the same time, he sold GEC's defence business to BAe for around £6 billion. Then a further three cash buys that year for around £160 million. October saw the company renamed Marconi.
In 2000, a further six purchases were made, totalling £265 million. Only in October did Marconi list on Nasdaq so it no longer had to pay cash for US companies. It also sold its retail/food arm for £102.5 million and its half share in a Russian phone network for $60 million.
Thus, entering the year 2001, with the Internet boom already behind it (but the board unaware), Marconi had no fewer than 11 new companies to keep track of. On top of the other companies it already owned.
The board eventually (too late) recognised the fact that consolidating financial details from all these companies was hugely problematic. And so in April 2001 (one month before its annual financial results), it announced a restructure, overseen by John Mayo. Part of this consisted of "the elimination of duplicate information systems through the implementation of a single company-wide systems platform".
The $250 million deal with Oracle for its E-Business Suite was announced with its financial results. It was to "provide an integrated transaction system, business intelligence and Internet platform on a single instance" and be implemented across the entire company. The new CFO Steve Hare said: "Oracle was selected because of the vision and understanding of our integrated business requirements, combined with the ability to implement very fast."
The system would be up and running for the majority of its businesses by March 2002, the board informed employees. However, the roll-out quickly got behind schedule and the most recent estimates at the company are than only half of the companies will be on the new system by the March 2002 deadline.
The system is to be run on ASP lines - something that concerns staff since it remains a largely unproven technology. At the time the Oracle deal was being thrashed out, the ASP model was being touted as the future, however since then its popularity has rapidly declined and companies have quickly shifted into different areas. On top of this, Oracle has no real experience in this field. It is also, we understand, planning to use its Alpha processor servers to run the system on - and Alpha will be swimming with the fishes in two years time following Compaq's deal with Intel.
While this continued delay will continue to cause Marconi grave problems in the future, the failure to introduce such a scheme earlier was the main contributing factor to the company's profit warning this month.
Unknown to the Marconi board, the telecoms companies it had invested heavily in were seeing a slump in demand with knock-on effects on the entire company. Whether complacency over the new system played a part in the board remaining blind remains unsure, but there was clearly an enormous failure on its part to find out what was going on in its subsidiaries. For this, John Mayo paid the price and Lord Simpson may still have to. ®