TELCO RINGING OFF IN PAIN?

While still with the company a few years ago, John Pluthero, former CEO and chairman of Cable & Wireless Worldwide (CWW), was the guest speaker at a telecoms industry dinner in London.  Pluthero, who can charm the birds from the trees when he wants, is also a very able communicator.  He pointed out that his company could trace its roots back to the 1850s, before the birth of British Telecom, or BT.

He then delivered a message he knew would make its way back to Ben Verwaayen, the then Group CEO of BT: “As the true incumbent operator in the UK, we at Cable & Wireless look forward to the safe return of our customers.”

With such a keen sense of history, I wonder how he feels today, given the news that Vodafone plans to acquire CWW for £1bn, effectively buying the business for spare parts.  I’d also be keen to hear what he would say to the 6000 people that still work for CWW.

C&W grew up as the British Empire’s de facto international telecoms operator.  In more recent times, CWW became home to a number of acquisitions including Energis (£750m in 2005) and Thus (£329m in 2008) in the UK.  Whatever else it is known for, C&W is not known for over-paying for assets.

It’s easy to say that the end game for C&W was inevitable, that it’s a case of the new digital world overtaking the old analogues.  Margins for traditional fixed line services such as phone calls and high-speed data connections are, after all, in decline and the likes of Google, Apple and Facebook over mobile networks is the future. I think this misses the point.

Social media and cloud computing only work when people are reliably connected at high speeds – over fixed and mobile services – to the servers that host the data they want access to.  C&W has invested heavily to take advantage of this data tsunami and cloud computing presents a big market opportunity.

CWW, in other words, is relatively well placed as a seller of shovels and services to those digging for digital gold.  It wasn’t disruptive technology that did for C&W. It was C&W.

Shortly after Pluthero arrived, he found the business in disarray and conducted a ‘strategic review’.  The business was trying to be all things to all businesses, they decided, and would focus on the 3000 largest customers it had.  C&W now famously wrote to around 27,000 of its business customers that were too small and unprofitable, giving them 90 days notice to find an alternative supplier.

It was clear that the business had lost its way and needed a turnaround.  Turnarounds need effort and senior management effort needs incentivising … with big carrots. A £60 million executive incentive scheme for a handful of the most senior executives in the business was unveiled.

According to a number of people in the business, the scheme drove short-term behaviours among senior management who ignored the longer term. Thousands of staff paid for the business’ habitual profit warnings with their jobs. The final die had been cast by an incentive scheme designed to avoid it.

It remains to be seen whether another player enters the bidding for CWW.  Tata Communications, which walked away from the sale negotiations last week, retains the right to return with a higher bid but the likelihood is that Vodafone’s bid will prevail.

CWW’s shareholders will accept the 92% premium to the share price since the sale talks opened and will either cut their losses or bank their profits.

Vodafone will use the business as a data network and avoid the cost of renting circuits from BT and others. The parts of CWW it doesn’t need will be sold to whoever wants them.

The C&W brand will live on in the Caribbean in the form of Cable & Wireless Communications but another bit of Britain’s rich engineering and technology history will go up in flames.

Mr Pluthero’s cultural interest, meanwhile, has moved on from history to abstract art.

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