Rating Management’s Effectiveness: With Case Studies in Telecommunications

301 Pages·2004·1.849 MB·English

by  Dimitris N. Chorafas (auth.)

Rating Management’s Effectiveness
Also by Dimitris N. Chorafas
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Transaction Management
Rating Management’s
Effectiveness
With Case Studies in Telecommunications
Dimitris N. Chorafas
ISBN 978-1-349-99971-2 ISBN 978-0-230-00590-7 (eBook)
DOI 10.1007/978-0-230-00590-7
© Dimitris N. Chorafas 2004
Reprint of the original edition 2004
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First published 2004 by
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Library of Congress Cataloging-in-Publication Data
Chorafas, Dimitris N.
Rating management’s effectiveness:with case studies in
telecommunications/Dimitris N. Chorafas.
p. cm.
Includes bibliographical references and index.
ISBN 978-1-4039-3728-5 (cloth)
1. Organizational effectiveness—Evaluation. 2. Industrial efficiency—
Evaluation. 3. Executives—Rating of. 4. Middle managers—Rating of.
5. Telecommunication—Case studies. I. Title.
HD58.9.C496 2004
384′.068′4—dc22
2004044687
10 9 8 7 6 5 4 3 2 1
13 12 11 10 09 08 07 06 05 04
Contents
List of Figures ix
List of Tables xi
Preface xiii
Part One Management Makes the Difference
between Success and Failure
1. The Concept of Management Effectiveness 3
1. Introduction 3
2. The functions of management 6
3. Effectiveness and efficiency defined 10
4. Management effectiveness and leadership 16
5. The sense of effective and focused decisions 21
6. The role of personal accountability 24
2. Rating Agencies, Management Effectiveness and
Creditworthiness 28
1. Introduction 28
2. External rating risk 30
3. Evaluating management effectiveness 33
4. Internal ratings and external ratings 36
5. The high cost of downgrading 39
6. Rating agencies, capital requirements and
management effectiveness 42
7. The strategy of deception in gaining higher rating 45
3. Is Mismanagement an Exception? 49
1. Introduction 49
2. The Ahold accounting scandal 51
3. Parmalat: Europe’s biggest bankruptcy 54
4. Exploits of a hedge fund with dairy products on the side 58
5. Cable & Wireless, and the CEO’s head 62
6. Downfall of Xerox and public accountants’ responsibilities 65
7. The Bridgestone and Ford fiasco. A case study 68
8. Cover-ups of management’s ineffectiveness.
Mitsubishi Motors 72
v
vi Contents
4. A Survival Strategy: Reinventing the Firm 76
1. Introduction 76
2. Reinventing the functions of management 78
3. Malfeasance shows management ineffectiveness, not skill 81
4. Standard Life, Equitable Life and Mannheimer
Life Insurance 84
5. Imperial Chemical Industries 89
6. The second downturn of Canary Wharf 90
7. The European air transport industry is losing altitude 93
8. Will the integration of ‘ten’ accession countries be effective? 96
5. Management and Mismanagement in
the Telecommunications Industry 100
1. Introduction 100
2. Irrational exuberance in the telecoms industry 101
3. Evolution of telecommunications services 105
4. Voice over internet protocol 108
5. Challenges with digital subscriber line 113
6. Wi-Fi wireless technology and its limits 116
7. Liquidity, indebtedness and external rating risk 118
Part Two Case Studies in Management Effectiveness
in the Telecommunications Industry
6. Big Telecommunications Companies Brought Themselves
to the Edge of the Abyss 127
1. Introduction 127
2. Ineffective managers spend other people’s money 129
3. The bubble of European telcos, credit exposure
and write-downs 132
4. The negative net worth of France Télécom 135
5. Deutsche Telekom’s creative accounting 138
6. Management ineffectiveness at British Telecom and NTL 141
7. The double pain in telecommunications: slow data
growth and falling prices 145
7. Mismanagement Led to the Downfall of Vivendi Universal 150
1. Introduction 150
2. Merrill Lynch rates Vivendi as ‘strong buy’ shortly
before its fall 151
3. Analysts finally appreciated external rating risk 155
Contents vii
4. Vivendi Universal and the conglomerization of the
entertainment industry 158
5. Competition in the borderline between telecoms,
cable TV and the media 162
6. The choice of mobile telephony rather than water 164
7. In the corporate world all bets are not equally effective 166
8. Lessons from the Crash of WorldCom 170
1. Introduction 170
2. A quick glimpse at the WorldCom saga 171
3. MCI WorldCom and its creative accounting practices 175
4. Restatements, proforma earnings and
mounting uncertainty 177
5. Differences between operating expenses and
capital expenditures 180
6. On 21 July 2002, WorldCom filed for bankruptcy 184
7. Investors and bankers most exposed to WorldCom 187
8. Players in a process of creative destruction 190
9. The year after WorldCom’s bankruptcy 193
9. Lessons from the Fall of Global Crossing, Qwest,
Exodus, Adelphia Communications and More 198
1. Introduction 198
2. Handling the debt of alternative carriers 199
3. Global Crossing and capacity swaps 202
4. Undercutting incumbent carriers’ pricing.
A Chapter 11 aftermath 206
5. A pattern of abuse, with deals made on the
back of investors 209
6. McLeodUSA, Williams Communications,
Marconi and Viatel 211
7. Conflicts of interest at Qwest Communications
International 213
8. Using a public company as family fief:
Adelphia Communications 216
9. Exodus Communications 219
10. Metromedia and MobilCom 222
10. Third-generation Mobile and the UMTS Licences 225
1. Introduction 225
2. Mobile technology and the telecoms dilemma 227
3. CDMA, WCDMA and the lack of good sense 230
viii Contents
4. 3G: business plans built on quicksilver 233
5. Who was responsible for the white elephant? 236
6. Killer applications are not the only challenge 240
7. Hutchison 3G: a test of third generation 242
8. NTT’s DoCoMo: an uncertain 3G test 246
9. Carriers who are prudent drop out of 3G, for the time being 248
11. The Fate of Vendors who Leveraged their Clients 252
1. Introduction 252
2. Overbuilding of telecoms capacity has hurt every firm 254
3. Back to basics: the telecoms slide was a self-inflicted wound 257
4. Alstom. A case study in leveraging through vendor
financing 260
5. Carrier failures led to earthquakes at equipment vendors:
Ericsson and Alcatel 263
6. The downfall of Lucent Technologies and of Nortel 267
7. Is there a ‘sure strategy’ to come up from under? 271
8. 2004: the good news is not yet final 274
Appendix 278
Index 281
List of Figures
1.1 Corporate governance becomes so much more complex
with globalization 4
1.2 Pyramid of managerial functions and the information
environment to which they belong 6
1.3 Limits are usually set in a three-dimensional space 11
1.4 A valid job description is threefold, and should always
be subject to management control 14
1.5 High business taxes are a characteristic of
government inefficiency 15
1.6 The values of personal characteristics tend to cluster around
the mean; exceptional people are at the right-hand tail 19
1.7 Flexibility in design does not ensure market success,
but it’s most likely 24
2.1 The role of regulators, rating agencies and
analysts vs the investors 32
2.2 Economic capital, solvency standard and level of
confidence, according to A. M. Best 35
2.3 Ericsson’s B share price relative to European telecom
equipment equities 40
3.1 Eleven years of rise and fall in the capitalization of Xerox 65
3.2 The mid-2000 collapse of Bridgestone’s share price,
following the fatal accidents 69
4.1 Mannheimer’s equity nose-dived a year before its failure 88
5.1 Billions of international minutes of use by top
telecommunications companies in 2003 (a) National minutes
of use only (b) International national minutes of use 102
5.2 Submarine fibre-optic cables and their utilization 120
6.1 What a difference two years make in telco superleverage! 128
6.2 Volatility in M&A activity of European telecoms, 2001–2003 131
6.3 British Telecom’s correlation between rising debt
and falling share price 143
6.4 Revenue growth at a sample of major American carriers 146
6.5 Year-to-year percentage change at a sample of
American telecoms 146
7.1 In five months, the Vivendi Universal share price
lost 60 per cent of its value 153
8.1 The leverage of Vodafone and WorldCom in the late 1990s 173
ix