Vodafone triumphs, Britain picks up the bill

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So farewell, Sir Chris. The imminent departure of Sir Christopher Gent calls for an examination of the rise of Vodafone.

So farewell, Sir Christopher Gent. As he retires as chief executive of Vodafone, there are two very different views of what his company has achieved.

First the positive story. Thanks to Vodafone’s success, Britain now has a new industrial giant to stand alongside BP and Unilever and take the place of Imperial Chemical Industries and General Electric Company. A business established less than 20 years ago is now the world’s largest mobile phone operator, with 100m-plus subscribers.

And then the negative story. After spending €250bn ($283bn) on foreign acquisitions (principally America’s Airtouch and Germany’s Mannesmann), Vodafone’s business is today valued at half that figure. Forced to begin writing down its assets, the company recently reported the largest loss in British corporate history. Never before have such grandiose plans come to grief so fast.

Both stories are true. The rise of Vodafone is a remarkable achievement. But no special business insight is needed to buy assets for far more than they are worth.

Sir Christopher is still widely respected – while other telecommunications bosses have left in ignominy – because Vodafone financed its acquisitions not with cash and debt but with its own overvalued paper. That is why it is still a viable business. Perhaps it does not matter if you pay fancy prices if you pay them with funny money. And since Vodafone’s value rested on hopes for the future rather than past achievements, it did not – as Time Warner did – have to relinquish real assets to merge.

But was the currency even worse than the price? Were Vodafone shares more overvalued relative to the real worth of Vodafone than Mannesmann and Airtouch shares were overvalued relative to the real worth of Mannesmann and Airtouch? The more Vodafone shares were overvalued, the better these deals were for Vodafone shareholders. But the more they were overvalued, the more absurd it was for these shareholders to be invested in Vodafone at all.

Admittedly, some investors in telecoms stocks genuinely believed the analysts’ fantastic revenue projections. But most British fund managers felt obliged to support Vodafone – and not just out of patriotism. At the peak of the stock market bubble, Vodafone accounted for about 15 per cent of the total market capitalisation of UK equities. Institutional investors underweight in Vodafone risked underperforming the index – especially as the price of the stock continued its dizzy rise. But following the acquisitions, much of the stock was held overseas. The resulting scramble for Vodafone shares itself contributed to further overvaluation – and made the next round of acquisitions possible.

Like all good things, it came to an end. Vodafone is today trading at less than a third of its peak level. Every share British institutions bought after the Airtouch and Mannesmann transactions is now showing a loss. The cost to the British economy of creating today’s Vodafone is the difference between the price domestic investors paid for these shares and their value in today’s more sober market environment.

It is impossible to quantify these losses accurately, because we should have to know what investment managers would have done if they had not been swept up in Vodafone’s progress. But suppose the average loss was £1 per share and the shares in question accounted for 10 per cent of the company’s stock (Vodafone has generally been the most actively traded share on the London Stock Exchange for several years). That amounts to more than £100 for every man, woman and child in Britain. That is what British pensioners, insurance policy holders and charities paid to create a great new British company. Perhaps they think it was worth it. But no one ever really gave them the choice.

The fund managers who pushed up the price of Vodafone stock, the investment bankers who promoted the deals and the executives who realised their grand ambitions will mostly, like Sir Christopher, enjoy a well-heeled retirement. As we hear of more pension fund closures and bonus reductions, not all the small savers who backed them will have done so well.

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