The price of failure


CHIEF executives are usually sacked for one of two reasons. Some are kicked out because they have a perfectly sensible corporate strategy, but simply fail to implement it. If you want an example, look at Ian Harley at Abbey National.

And some are kicked out because their strategy is bonkers, and investors eventually realise it - look at the shower who used to run Marconi.

Occasionally, just occasionally, we come across a rare bird - a chief executive who can be said to have failed by just about any measure you care to mention. He (or indeed she) decides to pursue an absurd corporate dream. And even the pursuit of that dream is badly executed.

Cable & Wireless's Graham Wallace is looking increasingly like that rare bird. Certainly, in the early days of his tenure at the company, he did some terribly sensible things. He sold the cable business CWC at roughly the right time. He anticipated the threat of competition in Hong Kong, selling C&W's stake in HK Telecom.

So far, so good. But the execution of neither of these eminently sensible transactions was perfect. Wallace didn't simply sell these (then) valuable properties for cash. Instead, part of the payment came in the form of shares.

C&W ended up owning chunks of the companies that did the buying. In the case of HK Telecom, C&W acquired a stake in the modestly titled Pacific Century Cyber Works, whose share price has subsequently collapsed by 95%. And in the case of CWC, Wallace - or more accurately, his investors - found themselves holding a stake in NTL. (Shares in NTL, in case you need to be reminded, aren't worth much these days.)

Nevertheless, if that was the sum of his misdeeds, Wallace would surely be forgiven: his ideas were right, even if he fumbled the ball when putting them into practice.

But his really egregious folly has been to try to spend the money that C&W accumulated from these early sales. Wallace has done something horribly reminiscent of Marconi. He has apparently been dazzled by the notion that the internet will eventually take over the world. And as the price of internet assets has tumbled, so Wallace has been seduced by the fallacy that if something is cheaper than it was yesterday, it must be a bargain.

C&W is even spending money laying new cables across the Atlantic, one of the most glutted telecoms routes on the planet. This is patently absurd. The company's investments in internet-related services have not worked out. Wallace paid out $850 million (£550 million) in a single deal, buying the Exodus internet hosting business. It needed further investment yet still shows no profit. And he spent $425 million on MCI's US internet 'backbone' - in effect, a wide internet highway. The operation carried 30% of US internet traffic; now its share is nearer eight%.

Yet after each profits warning, we hear only the same old story: things will get better. Will they? There is absolutely no reason to see why. There is vast over-supply of telecoms capacity. Owners of that capacity may well go bust and disappear, but the capacity itself remains.

Someone comes along and buys the capacity from the creditors of its bust former owner. They pay a rock-bottom price for the assets, so they can sell the services they provide at a rock-bottom rate. The competitive environment for the C&Ws of this world becomes ever tougher.

Wallace has failed C&W's shareholders. Those shareholders are finally voicing their unhappiness and anger. But Wallace shows no remorse, no willingness to step down from the company he has brought so low. He would rather continue to pick up £15,000 a week.

The fact that Wallace's contract would give him £1.5 million were he to be ousted is in itself a disgrace. Even more disgraceful is C&W's pretence (until this weekend) that this two-year contract is inviolate.

As we show today, it is no such thing. Since Wallace signed it, the contract has been modified three times. Apparently, changes favouring him are okay; changes that might hurt him are not.

Wallace's right to pocket a huge pay-off if sacked may well be legally watertight. But in a just world, that contract would be changed a fourth time. Wallace would be kicked out. And his departure would go as unrewarded as it would be unlamented.

The price of failure

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