CASE STUDY

                MARCONI PLC

The GEC group was a UK-based defence and electronics company, which produced strong operating performance from a series of growing and mature businesses. The operating results meant that the business was strongly cash positive. Indeed, during the 1980s and early 1990s GEC was criticized by the markets for the excessive cash holdings the company maintained; well in excess of £2 billion. This cash mountain was not required to fund the company’s growth, and the City’s view was that it should be returned to shareholders. In 1996 the management of the company changed, as did its strategy. Over the next few years a number of the company’s businesses were sold, including its defence interests. Acquisitions were made to reposition the company in the fast-growing telecoms sector, and GEC was re-named ‘ Marconi ’in 1999 to refl ect this. The serial acquisitions were paid for out of the company’s cash pile, and in addition debt was taken on to meet their fi nancing needs. By 2001 the company had net debt of about £3 billion. Although initially investors approved the change in strategy from a cash-rich low-risk defence company to a highly geared telecoms business, changes in market conditions in the telecoms sector led to the collapse of the company’s markets, its share price and its credit rating. Ultimately, shareholders lost all of their money. With hindsight, it is apparent that whilst it was wrong for the mature defence businesses to be fi nanced using equity (as will be discussed in Chapter 9), it was also wrong for the high growth telecoms business – with its considerable business risk – to be funded mainly with debt. The Marconi story appears to be a case of total mismatch of business and fi nancial strategies. However, whereas GEC’s over-reliance on equity ‘ merely ’irritated its shareholders, Marconi’s over-gearing destroyed the value of their investment.


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