How £15bn was wiped out

AT first blush, the first-half figures from Vodafone and Marconi appear to tell very different stories. Vodafone's announcement speaks enthusiastically of a 27% increase in turnover, operating profits up 40% at £3.4bn and an astonishing 69% rise in cash flow per share. Hallelujah!

Then there is poor old Marconi. In the first half, it made an operating loss of £222m. When exceptional costs and goodwill writeoffs are added, the loss of £5.1bn is described widely as the biggest deficit in British corporate history.

But is it? Probe the Vodafone figures more closely and put them on the same basis as Marconi, and there is a very different picture. Anything Marconi can do, Sir Chris Gent and Vodafone can do better. The only difference is that Gent chooses to hide the bad news in the small print and Marconi's new chairman Derek Bonham, who learned his accounting at the knee of Lord Hanson, chooses to come clean.

The reality is that, far from making a profit of £3.4bn, Vodafone's total group pretax loss was £8.5bn, easily outstripping Marconi's. This is because it, too, has heavy exceptional items of £4.5bn and chose to write off an astonishing £6.7bn of goodwill.

In fact, between them, these two paragons of the hi-tech sector managed to wipe out £15bn of capital at the stroke of a pen - £250 for every man, woman and child in the country. The exceptionals and write-offs at both companies point to managements so caught up in the telecoms bubble that they totally ignored the sensible valuations of businesses and assets conducted by a previous generation of managers such as Lords Hanson and Weinstock.

There are, of course, key differences-between Vodafone and Marconi. Gent (like Hanson) was smart enough to understand the conjuring trick of the new economy, which is to pay for assets with shares, rather than allow debt to build up against assets that vanish before your eyes. Moreover, he appears to have invested in a business that could have a bright future, even if the great hope of third-generation mobile licences proves disappointing.

The ousted chiefs of Marconi are spotlighted in a BBC2 Money Programme at 7.30pm tonight. Despite the investment banking knowledge of former finance director John Mayo and the combined experience of ousted chairman Sir Roger Hurn and chief executive Lord Simpson, they showed no such knowledge of the power of paper. They took payment for disposals in paper and dissipated cash as if there were no tomorrow.

Away went Weinstock's £3bn cash pile, plus billions from selling power company Alsthom and the defence arm. The result was a massive transfer of cash from Marconi shareholders to the owners of the overvalued US telecoms equipment assets it bought.

When Vodafone shares tumbled, all the asset sellers who had taken the company's paper suffered. When Marconi's shares fell off a cliff, it was its old shareholders who suffered. The proprietors of firms it bought, such as Fore Systems in the US, must be laughing all the way to the bank.

What is really worrying about Marconi is the continuing bewilderment about its future. It may have been cash flow-positive in the first half, but the prospects are hardly encouraging. Sales are down 19% and it is still unable to make any forecasts.

Add to this the uncertainty about the attitude of the banks, and you realise that the management horror story at Marconi is far from over.

Prices at bay
THE age of inflation appears to be a thing of the past. Although the underlying rate was stubbornly steady at 2.3% in October, it appears set for a fall. With demand in the economy softening, as shown by the latest CBI regional survey, prices for goods can be expected to drop.

The main reason that underlying inflation has remained above 2% is the strength of the service sector. But all the indications are that the slowdown is spreading from manufacturing to services, and the ability of utilities and other service firms to raise prices will be severely constrained.

Moreover, the price of petrol, which could drop by as much as 6% in November, could knock 0.3% off the underlying rate next month.

Capital Economics believes that inflation could drop below 2% this month. The headline rate already stands at 1.6%.

Given that the inflation target is 2.5%, this will give the Monetary Policy Committee the chance to cut rates again from the present 4% when it meets early in December.

After all, it does not want to be responsible for a bout of Japanese-style deflation.