For Cable and Wireless the future is in the Orient, but can the company's ebullient chief ensure it is first to the prize?
Lord Young, the former cabinet minister and property developer, is in his element. For a man who loves the fast lane, the chairmanship of Cable and Wireless is the perfect vehicle. He sits behind the wheel of an international telecoms group that manages to combine Formula One profits growth with the sales of a £4.7 billion juggernaut. Yet, despite the company's success, there are those who doubt he has the skill and vision to steer past the many obstacles that lie ahead.
The doubters fret that the current chairman lacks the mental horsepower of his predecessor Lord Sharp. For some he appears suspiciously like Toad of Toad Hall, the dizzy character from The Wind in the Willows who bought a big red racing car. Lord Young does not deny he is driven by enthusiasms: 'I'm a child of the war, we had no toys, I've been making up for it ever since,' he says playing with the Psion pocket computer, which he claims has changed his life. Then he bounds over to the desktop video conferencing system he has had installed for all his senior managers. Eager to demonstrate, he calls one of these managers, who is out.
The next couple of years should settle, once and for all, whether Lord Young is on the right wavelength. C and W's continued existence as a federation of far-flung businesses is in doubt. At home, competition is lining up against Mercury, its telephone network. Abroad, rivals such as BT and AT and T, the giant American phone company, hunt for alliances which threaten C and W's position as an international telecommunications company.
Since being privatised in 1981 the group has shaken off its colonial image as the engineering arm of the Foreign Office. Under the stern guidance of Lord Sharp it became one of Britain's most successful companies.
Today the group has a market capitalisation of £9 billion and employs more than 40,000 people around the world. As well as a 57.5% stake in Hong Kong Telecom and an 80% stake of Mercury in Britain, the directory of assets includes Caribbean operations, ringing up more than £150 million in operating profit on sales of £477 million. There is also an American business generating revenues of £383 million from sales to small and medium-sized companies. Lastly, there is a rag bag of more than 30 mobile licences and additional fixed link licences stretching from the Baltic to Australia.
But the future is in the Orient. Hong Kong Telecom produces 70% of the group's operating profit and provided most of the £2 billion spent to build Mercury's network in Britain. With profit margins of close to 40% the returns in the colony dwarf every other area of C and W.
The man now guarding this gold mine is Linus Cheung who joined earlier this year after having served 23 years with the Cathay Pacific airline. China represents about 20% of Hong Kong Telecom's total telephone traffic and calls to and from the republic are increasing at a rate of about 30% a year. Lord Young and Linus Cheung's mission is to ensure that the company will be first in line should the People's Republic ever allow foreigners direct access to its telecommunications market.
Cheung explains what is at stake: 'There are 28 million phone lines in China, by the end of the decade the government has a heroic target of installing 114 million - do you realise how big that is? It's like adding a company the size of BT each year until the end of the decade.' Hong Kong Telecom has a good chance of winning some of this business. The Chinese government holds 20% of the company through Citic, its investment vehicle. The relationship was strengthened earlier this year when the Ministry of Posts and Telecommunications - MPT - took 49% of a venture, the majority owned by Hong Kong Telecom and C and W, to lay submarine cable - the first such joint venture with a foreign-owned telecommunications operation.
The belief within C and W is that by the end of this year there will be another breakthrough in China. Cheung explains: 'I believe China may be looking at modifying the current rules and regulations on telecommunications as it has done in other areas. That will be good for Hong Kong Telecom and C and W which have always been preferred suppliers.' Few believe that anything else in C and W's collection of assets comes close to China in terms of profits today and promise tomorrow. This is certainly the view of the stock market. To the continued irritation of C and W's leaders, the group's £9 billion market capitalisation is only equal to the Hong Kong Telecom holding and Mercury. All the other businesses are valued at next to nothing. Lord Young's biggest failure to date has been his inability to convince investors in Britain and overseas that there is more value to the group.
He boasts that his company is the fifth-biggest telecommunications group in the world but few are impressed. The industry is populated by many of the world's largest companies. AT and T of America is capitalised at just under £50 billion and BT £23 billion. Over the next three years another £40 billion of private funds will be sucked in when France Telecom and Deutsche Telecom go public. In Lord Sharp's day, these monsters were confined within national frontiers - but not any more.
From the day Lord Young joined C and W in October 1990 there have been worries that he might not be the best person to cope with this threatening environment. One stock-market analyst who follows the company closely says: 'Lord Young is not good news, I have little faith in his ability to analyse the problems facing C and W.' Without the domineering character of Lord Sharp, C and W looks more and more like a riddle: what does Mercury have in common with Hong Kong Telecom? Likewise, how do phone holdings in Australia, the Baltic and the Caribbean amount to a well-positioned international telecommunications company?
John Tysoe, who follows the telecoms industry for Societe Generale Strauss Turnbull, the investment bank says: 'C and W does not have the capital resources of some of the other groups in the industry - it is too spread out for its size.' Another concern is Mercury, which has 13% of the British phone market, a position built up at a time when it was BT's only competitor. That changed when the Government's Duopoly review allowed other companies, such as Colt in the City of London, and the cable television companies to enter the market. In the near future, Energis, run by Gordon Owen, a former C and W managing director, will compete as a carrier of trunk calls in Britain. Mercury's chief executive, Mike Harris, admits that over the next year his business's 16.6% operating margins will come under increasing pressure.
But Lord Young is bullish. C and W, he often repeats, is big enough to compete but small enough to remain flexible and quick on its feet. Such confidence is typical. David Young's career has been about delivering solutions.
To date he has had plenty to deliver. Despite the worries, the C and W engine is purring smoothly in top gear. This year the company joined an exclusive club of British businesses earning £1 billion-plus in profit. Pre-tax profits increased 18% for the year to March 1994 - since Lord Young joined in 1990 operating profits have doubled.
He is disarmingly honest about his role in the company's success: 'I'm not a manager, I don't like the day-to-day detail. My role is looking at the big picture, I'm very much deals orientated and spend a lot of time meeting presidents and prime ministers.' Lord Sharp was able to do the job of chairman and chief executive but Lord Young recognised two things right away: C and W needed to be shaken up and he wanted a chief executive to run the company.
He remembers: 'I looked around the business and could see that it had this culture of engineering excellence, yet we were moving into a world where the company had to be more competitive, more aware of marketing. We were in an era when the customer was king.' Lord Young wanted someone from outside telecoms who could look at C and W's with fresh eyes. That someone was James Ross, who joined from the oil giant BP, where he had been a main board director.
Ross, who is described by his chairman as manna from heaven, was promised he would be given a free hand: 'There's no point in having me check the figures and that kind of thing. You don't want two people doing the same job,' Lord Young says.
Ross's version of the C and W dogma is that Lord Young, 'is an ideas man, with a great enthusiasm for technology. We often joke that he has 10 ideas and I point out the nine that can't work.' The two men appear to fit hand in glove. Which is just as well, because Lord Young has not been afraid to crack heads. Within a year of joining the company in October 1990, Gordon Owen, the highly regarded managing director, quit, following rows. At the mention of his name, the chairman looks pained and refers to his old colleague as 'Poor Gordon'. Those close to Owen say he found the new chairman an ego maniac.
Owen was followed by Peter Van Cuylendberg who left in March 1992. He commented that Lord Young was more a leader than a manager. News of his departure knocked £500 million from C and W's market capitalisation as the City groaned about lost talent.
Ross and Lord Young see it differently. 'Telecommunications is too important to leave to the specialists. With an industry that is changing rapidly there is a danger if your expertise is too narrow,' Ross explains.
He has a point. Telecommunications is less and less about phone calls and more about data and new services, such as video on demand. Ross says these services will push C and W up the value chain. Over each of the next three years more than £1 billion will be spent in Britain and Hong Kong to improve the network and develop new services. Robb Wilmott, the former chief executive of ICL and electronics wunderkind, has been signed up to scout for hi-tech companies to invest in. These, it is hoped, will plug C and W in to the latest technology and services. Lord Young promises that within three years, half Mercury's sales will come from new software products not yet being sold.
Ross spent his first six months at C and W brainstorming with a small group of senior managers in an effort to get to grips with how he was going to run the company while Lord Young jetted the world clinching deals. He was not over-pleased with what he found: 'There was a lack of professionalism around the group,' he says.
C and W's natural inclination to pull itself apart at the seams had been accelerated by Lord Sharp. He had wanted the operating companies to have more responsibility. This, according to Ross, led to duplication of some management functions and a lot of slackness. He claims to have already saved £50 million by co-ordinating basic operations such as purchasing.
The donnish Ross wanted a grand unifying theory that could give C and W the coherence it lacks. The Harvard Business Review of November 1992 provided the answer: an essay by Charles Handy, the management guru, entitled, Balancing Corporate Power: A New Federalist Paper.
C and W was to become a federation. From now on, head office would provide strategy, the allocation of resources, together with the legal obligations of a holding company. Also, expertise within the group, such as Hong Kong's experiments with video on demand, or Mercury's experience with wireless communications, should flow around the edges to where they are needed. This, Ross and Young hope, is the group's added value that will eventually lead to a higher share price.
The federation is about management style but what concerns many is Lord Young's strategy for C and W outside Hong Kong and China. This strategy is based on three geographic hubs. Hong Kong and the whole of the Far East, Britain/Europe and, lastly, the Caribbean.
This strategy is consistent with the message Lord Young spelt out when he first arrived four years ago. C and W was to be a superniche player. The likes of AT and T and BT might snigger about the company's investments in St Petersburg, Latvia or other nooks and crannies of the globe, but they provide high profit margins.
The trouble is that Lord Young's strategy baffles a good many people. Keith Mallinson of the Yankee Group telecommunications consultancy explains: 'Cable and Wireless only has 1% of the American market. The company claims to be an international carrier yet it has only a tiny piece of the market where the biggest proportion of international business calls and data communications is either generated or ends up.' This is a serious concern and could eventually undermine C and W's position in China. Telecommunications, like finance before it, is becoming a single global market with America at the centre. For this reason BT announced it intended to buy a 20% holding in MCI, one of AT and T's main competitors for long line and international traffic. Likewise, France Telecom and Deutsche Telecom have said they want to pay over $4 billion for a 20% stake in Sprint, another challenger to AT and T. The dinosaurs are showing a swift turn of pace while Lord Young's boast that his group is the only truly international player seems lame.
The confusion that outsiders face when looking at C and W is now increasing daily as major fault lines start appearing in the federation. Both Lord Young and Ross have expressed grave doubts about joint ventures with AT and T. Ross explains: 'Recently I was at a conference where an AT and T executive showed a slide of a lawn roller and said, "Either join us or we'll flatten you." You can't do business with a company like that.' A few weeks after saying that, Hong Kong Telecom admitted it was holding talks with AT and T. Likewise, after spending a great deal of time talking about the three hubs, Ross now admits: 'We can't stand still in America; we must be bigger.' The new line from the federation is that it is looking for partners in America.
Like Toad of Toad Hall, Lord Young always manages to sound convincing and has a winning way with people. If he can deliver the riches of China no one will give much thought to his inability to explain where C and W is really going. Despite all that he and Ross say, the stock market rates the group simply as a holding company of exotic telecom assets. Instead of sitting behind the wheel of one of Britain's fastest moving companies, Lord Young might find he has a snarling tiger by the tail.
Turnover by division 1993 (£m):
International telephone services 1,830.2
Domestic telephone services 979.4
Other telecommunications services 546.7
Other: Equipment sales and rental 309.8
Cableships and contracts 159.7
Turnover and operating profit
by location (£m):
Asia and Pacific 1,701.4 563.3
M. East, Indian Ocean + Africa 83.2 17.8
Western Hemisphere 707.9 80.0
UK and Europe 1,367.9 168.2
Inter-regional turnover (34.6) -
Central and corporate costs - (38.4)
Business development costs - (19.9)
Total 3,825.8 771.0
Shareholders funds (£m): 3,018
No. of employees: 39,837.