GEC must think high-tech to gain in market value

GEC must think high-tech to gain in market valueIf Lord Simpson wants to boost GEC he will have to do more than sell off Marconi defence, says David Manners
Does Lord George Simpson know what he’s doing? Or what he’s getting himself into?
Since taking over GEC he has appeared to make prodigious efforts at analysis but the deliverables are unimpressive.
Just about the easiest deal any boss of GEC could have pulled off would be to sell the Marconi defence business.
While one wonders what value is left in last week’s ?1.3bn Reltec purchase after Wall Street takeover kings KKR (Kravis Kohlberg Roberts & Co) bought 80 per cent of Reltec’s shares for $6.60 and sold them to GEC for $29.50.
Simpson does not appear to have done anything difficult. After talking to the chiefs of all the world’s largest defence companies in the US and Europe looking for a deal he ends up simply selling off his defence arm to British Aerospace.
And after declaring an interest in the telecoms/networking area he buys a company from a Wall Street leveraged buy-out specialist who will net a cool billion bucks from the deal. But what has GEC gained from buying Reltec?
The answer, we are told, is that Reltec has a great customer list citing AT&T, BellSouth and Bell Atlantic and that GEC sees a great future in selling wideband equipment to them for local telephone lines.
But just how keen are the Baby Bells to instal wideband services? After all, wideband for local lines had to be enforced by legislation in the US.
The US Telecommunications Act of 1996 was passed specifically to force the Bells to give up a line to any local telecoms service provider who had a customer for a wideband line.
The Bell companies were loath to install wideband because they would then lose their T1 (business line rental) revenues. If you can get wideband for $30 a month you won’t pay thousands of dollars for a leased business line.
So the US – the freest market in the world – had to legislate to force its telcos to provide wideband, and the companies leading the way are not the Bells but the CELECs (Competitive Local Exchange Carriers) – entrepreneurial outfits which have sprung up in the large cities to take advantage of the 1996 Act by advertising wideband services, finding people who want them, then forcing the Bells to give up a line for each customer they recruit which they then equip with xDSL chips.
So the CELECs have been much more avid customers for wideband than the Bells and America, having passed its law forcing open the wideband market three years ago, is now seeing demand for wideband take off.
Naturally, some of the smartest companies in America are rushing to supply the equipment for it. Key to it all are fancy chips from the likes of Broadcom. Of course GEC/Reltec can buy chips from Broadcom like everyone else, but will that give it an edge in the market?
Increasingly, in high technology markets, it is superior technology protected by proprietary intellectual property (IP) rights which bestows a competitive edge.
When HDSL chip-sets were only used by traditional telcos to provide business leased lines, then the market was not particularly competitive. Now it is becoming a mass market, with wideband for everyone, the competition will become intense. Only the best technological solution – i.e. xDSL chips which support the maximum of lines with the minimum of power dissipation – will win.
That is why Silicon Valley companies like Centillium Technology and Itex got set up – to produce innovative technological solutions to the problems of having to upgrade lots of lines at the exchange end with all the heat and intereference problems that causes.
Ironically GEC has got rid of the UK company which best understood the telecommunications chips business and could have developed superior technology protected by proprietary IP – GEC-Plessey Semiconductors (GPS). GEC sold GPS for less than one year’s revenues.
By contrast GEC has paid twice one year’s revenues for Reltec, a company whose margins are so wafer thin that it made only $30m on sales of $1.07bn last year and warned, in January, that its margin growth would be slower than expected.
One very much hopes that this difference between the perceived value of Reltec and the perceived value of GPS does not suggest that there beats in Lord Simpson’s breast that disdain for the advantages of superior technology and proprietary IP which has for many years seemed ingrained in British electronics CEOs.
We can be sure that one thing is close to Lord Simpson’s heart – GEC’s share price. An apparent enthusiast for the popular ‘shareholder value’ doctrine, he has said he wants to restore GEC’s capital value to the point where it was before Marconi defence was sold.
If he wants to boost GEC’s capital value, then he should take a look at companies with a high capital value in high-tech. If he does, he might notice that many of the highest valued companies have something in common – they have superior technology and proprietary IP.
No one exemplifies this more than ARM – now valued at over ?1bn on the stock market – it has nothing else except superior technology and proprietary IP.
Maybe Lord Simpson should take a trip to Cambridge.

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