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FSA REPORT ON MARCONI – BAE SYSTEMS NEXT?

12 Apr 03. The damning UK Financial Services Authority (FSA) report on Marconi is expected to send shock waves through the boardrooms of UK Plc with BAE SYSTEMS likely to be particularly concerned given the FSA’s current investigation into possible insider share dealing in BAE shares prior to the catastrophic profit warnings following the Astute and Nimrod problems.

The FSA took two years to report on the few chaotic weeks which reduced Marconi from the flagship of UK industry to a shell worth less than £50m.

The FSA criticises Lord Simpson and Sir Roger Hurn for failing to inform the Stock Market of profitability problems within the group. The FSA concluded that Marconi failed to comply with listing rules, specifically Rule 9.2(c) which calls for the release ‘without delay’ of a change of ‘the company’s expectation as to its performance’.

Carol Sergeant the FSA’s managing director said, “We require companies to keep the market informed of price sensitive information without delay so that investors can be sure they are making financial decisions based on the most up-to-date information.”

On December 13th the problems associated with the BAE SYSTEMS Astute and Nimrod contracts were clarified by BAE SYSTEMS in a short statement. Some observers suggest that the company was forced into making the statement by the MoD. It was quite certain that the week-end before the City were quite unaware of the problems as the Editor contacted BAE ‘shop’ Hoare Govett and asked whether they were aware of the problems. Cazenoves touched on the problems on the Thursday before in a written advice on the company.

BAE announced that, ‘Additional issues have arisen in relation to its Astute attack submarines and the Nimrod MR4A aircraft. BAE SYTEMS has been reviewing with the UK MoD the outlook for these contracts and it has now become apparent that there are substantial schedule and cost implications. The company and the MoD are continuing to discuss the extent to which these two contracts can be modified to the mutual benefit of the MoD and BAE SYSTEMS. Discussions with the Mod are likely to take some months and no assurances as to the outcome can be given. However, the company anticipates agreeing with the MoD the principles to be applied in the envisaged contract modifications in order to be able to assess any cost implications by the time of the company’s 2002 Preliminary results announcement in February 2003.’

However, as BATTLESPACE revealed at the time, ‘The company is believed to have sent a top level delegation to Number 10 on Monday November 18th to discuss these two problem contracts’ and used the excuse that they could not inform the City until negotiations had been finalised.

The FSA commenced an investigation into allegations of insider trading of BAE shares in the build up to the announcement. As the Editor said to a leading City figure, ‘Everyone apart from BAE appeared to know what the problems were, so you could hardly call it insider trading’.

One outcome of this FSA enquiry may be to beef-up the way in which companies such as BAE and Marconi communicate with the City, shareholders and journalists alike. A tinge of arrogance in dealings was noticed in both companies, in Marconi’s case the City bit back and the FSA put the icing on the rather stale cake. The Marconi debacle is noted to be the largest corporate collapse in UK financial history, with the company value (including retained funds and share value, falling from £7bn to £50m.

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