Telecoms struggle with huge losses

Over-ambitious acquisitions during the late 1990's technology boom have plunged two of the UK's biggest telecommunications companies deep into the red.

Telecoms equipment maker Marconi on Tuesday said it lost £5.1bn ($6.6bn; 7.4bn euros) in the six months to September 30.

Marconi figures

Losses: £5.1bn

Sales: £2.58bn

Total value: £867m

Debt: £3.5bn

Employees: 49,000

Also on Tuesday, mobile operator Vodafone announced that it racked up losses of £8.45bn over the same period.

In both cases, the bulk of the losses stem from the companies' decision to absorb the cost of recent acquisitions now, rather than wait for their new subsidiaries to pay for themselves.

Good money gone bad

Both Marconi and Vodafone are in effect acknowledging that they cannot recover the money they spent snapping up their smaller rivals two years ago, when investors were bullish and cash was plentiful.

Vodafone figures

Losses: £8.5bn

Sales: £13.4bn

Total value: £118bn

Debt: 9.24bn

Employees: 56,800

In the feverish atmosphere of the late 1990s, when seizing market share was seen as more important than making a conventional profit, both companies paid vastly inflated prices for their acquisitions.

However, while Marconi and Vodafone share a common debt problem, investors take a sharply different view of their future prospects.

Marconi's shares fell by nearly 5% after its results were published, while Vodafone's edged slightly higher.

Demand for 3G mobiles untested

This is partly because Vodafone's overall financial position is healthier.

The company made a trading profit of £3bn during the six months to September, 65% higher than the same period one year earlier. The company's total sales also rose sharply.

Marconi, in contrast, made a trading loss of £222m over the six months. Ominously, total sales for the period fell by nearly 20% compared with one year earlier.

Marconi's challenge

More importantly, investors believe that Marconi, a manufacturer, faces far more serious challenges than Vodafone in the short to medium term.

With no end to the current global economic downturn in sight, analysts doubt that demand for the telecommunications equipment that Marconi produces will pick up any time soon.

This will make it more difficult for the company to repay its £3.5bn debts.

In contrast, Vodafone, a provider of mobile telephone services, is relatively insulated from the manufacturing slowdown.

Moreover, while Vodafone's late nineties acquisitions didn't come cheap, its numerous subsidiaries have put it in pole position to cash in on future mobile telecommunications booms in key markets such as Japan.

Doubts over 3G boom

The question remains when, if ever, these future mobile communications booms will materialise.

Vodafone has run up debts of £9bn to pay for licenses needed to operate future mobile telephone services, even though demand for these services remains untested.

Some investors view this as a major weakness, arguing that the company will face a debt crisis if demand for new generation mobile services fails to get off the ground.

But Vodafone's supporters point out that the company remains in a better position than rivals such as BT, which borrowed nearly £30bn to fund its new generation mobile operations.