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Richard Li: He must show that he is up to running a company with more than 15,000 employees. His previous company had 1,000.

Inside the PCCW Merger
Can fallen angel Richard Li manage the new PCCW and regain investors' confidence?

Meet the Boss:
Li shows a calm exterior even as criticism of his company mounts

The day before Pacific Century CyberWorks — PCCW — officially merged with Hong Kong's dominant telecommunications operator Cable & Wireless HKT, PCCW chairman Richard Li Tzar-kai briefly checked into his new penthouse office. A feng-shui master had determined that a two-hour period in the late morning of Aug. 16 was the most auspicious time for him to officially move in. For more good luck, the soothsayer advised Li to enter the Telecom Tower in Hong Kong's Quarry Bay district with his seven most trusted lieutenants. Li, 33, and his seven samurais (some are pictured in the following pages) duly performed the ritual.

The magic doesn't seem to have worked. Fortune has yet to shine on the newly merged enterprise, which is keeping the PCCW name. In the six weeks since the union, PCCW has taken a severe beating from investors who pulled its share price down to as low as HK$8.20, well below its immediate pre-merger price of HK$15.80 and less than one-third the all-time high of HK$26 it hit in February. Key ventures with giant U.S. Internet incubator CMGI and Taiwan's GigaMedia have fallen apart. And as PCCW's share price melted, Australian telecom company Telstra demanded a renegotiation of a crucial deal that would have seen a $3-billion cash injection into PCCW, easing a debt load of some $12 billion. Hong Kong's Cyber Superman seemed to have lost his golden touch.

He is taking his troubles in stride. "Do I feel more relaxed now that we have more management, more resources, more control and more funds [after the merger]?" Li asked last week. "Absolutely. Do I feel good about [destroying] shareholders' value? No. But am I jumping out the window? No. I'm just plugging away, working as hard as I can." The young tycoon sounded cheery and relaxed in exclusive interviews with Asiaweek (see page 64). Insiders say Li seemed surprised by the stock-price fall in the first days following the official union. Now, he says, "I'm a much calmer and happier person than before the takeover when the stock was at HK$26. Boy, it makes me feel stronger about [the company to see] all those things that have come together."

His work has only just begun. With all the talk over the falling stock price and the fumbled deals, the HKT merger has been lost in the hubbub. In fact, it is the critical challenge facing Li and both companies. Can an Internet start-up with 1,000 staff wed a 14,000-strong former telecom monopoly and live happily ever after? A high profile failure would be a huge blow to Li, who has been touted as a new-generation entrepreneur who will bring broadband to Asia. He is still dogged by perceptions that he got where he is thanks to his dad, Hong Kong billionaire Li Ka-shing. This is Richard Li's personal test: Can he build his own successful business?

In a determined effort to find an answer, Asiaweek sat in on private meetings, observed life within the executive offices and interviewed virtually all of the key individuals who will determine the success or failure of the union. Although it is obviously impossible to predict the outcome, we can conclude that the outlook is not as dire as some critics suggest. Indeed, Li has a point when he says that CyberWorks has merely suffered from the same negative investor sentiment as other Internet companies. For example, Li likes to compare PCCW to Yahoo!, the giant U.S. portal. It closed trading Oct. 3 at $84 per share, 65% below its 52-week high reached early this year. By contrast, PCCW closed Oct. 5 trading in Hong Kong at HK$8.25, 69% below its February high, reached in the middle of investor euphoria over the HKT bid. The fact that other Internet companies have seen their stock prices decline doesn't necessarily excuse or explain PCCW's drop. Still, investors may want to focus more attention on the merger as they decide what value to place on the company.

Li must fuse a dynamic new company that had been investing in Internet-related ventures and in a daring broadband content service on to the plodding, 126-year-old Hong Kong telecom subsidiary of London-based multinational Cable & Wireless. The merged entity aims to leverage the phone company's strong Hong Kong base and expand its bread-and-butter businesses as well as its high-growth cutting-edge services into the region and beyond. There are numerous pitfalls. "Both parties have to give and take because they both have very strong cultures," reckons former HKT chief executive Linus Cheung Wing-lam, now one of PCCW's three deputy chairmen. "But how do you blend them to be effective? It's not an issue of dominance but teamwork."

The cultural differences were brought home Aug. 17 at Li's first meeting with senior HKT staff. The chairman wore his now trademark open-necked blue shirt, blue blazer and khakis. The HKT executives (and some PCCW officers) came to work in suits. Introduced by David Prince, the merged PCCW's new chief financial officer, as "Mr. Richard Li," the junior tycoon looked amused. "Call me 'Richard,'" he said. "When we see each other in the corridor or the lift, I hope you will say hello and call me by my first name." Li says many employees are taking him at his word. "A wave of competition is coming, and standing on formality and baloney is no way to compete," he says. "It's about getting down and getting the work done and serving the customer well."

Mergers often fail if the new partners cannot develop personal chemistry. Cheung, whose buttoned-down demeanor contrasts sharply with his buzzcut boss's persona, appears to be consciously trying to bridge any gap. The former HKT CEO dutifully offered Li his own office. Li preferred a smaller suite next door. Cheung, who describes himself as "a team player not driven by ambition but by my sense of responsibility," walled off about a third of his office to accommodate his personal assistant. "I don't accept that the deputy chairman's office should be bigger than the chairman's," he says.

While not as close to Li as other senior executives like deputy chairman Francis Yuen or executive committee deputy chief Alexander Arena, Cheung praises PCCW and Li for being "sensitive and accommodating about our [HKT's] culture." In a meeting days before the merger, top management including Li and Cheung debated the name of the combined company. They decided to call the entire group Pacific Century CyberWorks — in English. In Chinese, Li insisted on a new four-character name, starting with the last two characters of HKT's name followed by the first two of PCCW's. He waved aside objections that the character order is illogical — the literal English translation is Telecom Pacific Century. Li later explained to appreciative managers that he wanted to pay homage to HKT's accomplishments.

These are important symbols, but no one really thinks that Li's kind and cool approach alone is going to turn the new PCCW into a world-class company. Tough decisions will have to be made and a lot of toes will get squashed. Even though PCCW publicly insists that the $38-billion union is a merger of equals, not an acquisition, PCCW is clearly taking over. Li has not been shy about hiring rank outsiders. Jeffrey Bowden had been chief strategy officer for the U.S. Baby-Bell NYNEX Corp. He was part of the team that negotiated the northeast company's merger with Bell Atlantic. (This combined firm has since merged with GTE to become Verizon Communications. Verizon, coincidentally, is the "Plan B" company Li hopes to hook up with if the Telstra deal fails.) Li personally recruited the 19-year veteran of the telecom industry to be the executive vice president in charge of integrating PCCW and HKT.

Bowden does not see cultural differences as a big problem. Instead, he regards the key challenge as the transformation of the core telecom assets into a regional powerhouse. This means a substantial reorganization and a new commitment to transparency. Analysts welcome PCCW's intention to publish separate sales and profit numbers for each of the eight units the company plans to form. One of Bowden's primary mandates is to integrate operations in such a way that each unit works independently — but cooperatively — with the others.

Bowden says the integration should be completed by the end of the year. Will some people lose their jobs? Drawing on his experience with the NYNEX-Bell Atlantic union, Bowden says fears that mergers always result in layoffs are unfounded. The official line is that PCCW's regional expansion will easily absorb existing personnel. Cheng Chun-man, chairman of the Hong Kong Telecom Employees Union, says he sees no indication that staff numbers will be cut, even though management has yet to brief employees about the integration. The union members could be formidable adversaries. HKT had to back down on plans to cut benefits in 1998 after strong protests.

Once the new structure is in place, says Bowden, PCCW should easily be able to help its corporate customers develop business-to-business connections outside Hong Kong. "The analysts don't truly understand the leverage we have to satisfy customer needs and integrate them across Asia," he says. "We're getting zero premium for growth outside Hong Kong." But that new growth is predicated in large part on the deal with Telstra — and that partnership is still being furiously renegotiated. No agreement had been signed as of Oct. 4.

PCCW hopes to set up a venture that will own and operate two companies. One will run the IP [Internet Protocal or broadband] backbone and that of Telstra. Another separate company will pool together most of the two partners' mobile-phone assets to create a pan-Asian network. "The IP backbone businesses of PCCW and Telstra is one of the most substantial anywhere in the world," Bowden says. (An IP backbone comprises submarine cable systems, earth satellite stations and other equipment for the transmission of huge volumes of voice and data to computers, television sets and other devices.) The combined PCCW and Telstra backbone will be the world's third largest.

The merged mobile-phone assets have the potential to become a big player too. In addition to their home markets, both companies have interests in cellular operators in other Asian countries such as Singapore. If it goes ahead, the deal with Telstra will help PCCW compete in expensive auctions for third-generation mobile-phone licenses in Hong Kong and elsewhere. The partnership is reportedly being held up over the strike price at which Telstra can buy PCCW stock if it decides to exercise the purchase option for its $3-billion worth of convertible bonds. The original price was set at HK$19.52, more than twice its current price. "The delay indicates that Telstra is pushing a very hard deal that will be unfavorable to PCCW," says James Loh, an analyst with online research site He worries that Li may hurt PCCW's furture by seeking an expedient deal today.

Li declines to comment on the specifics of the talks with Telstra, but he has brought up the possibility that CyberWorks could look elsewhere for the money it needs. Analysts say the Telstra talks could still collapse. "Telstra would like to prevent a pullout, but it is under pressure [from stockholders, which include the Australian government] to change the deal," says Paul Budde, a Sydney-based telecom consultant. Before the stock price slide, Telstra CEO Ziggy Switkowski touted the PCCW partnership as the best way for the cash-rich Australian telco to expand in Asia.

"Richard Li is under pressure too, but it is in his interest to see that the whole thing goes through," adds Budde. The conventional wisdom is that if Li is to avoid future stock drops, he'd better avoid soured deals like CMGI's decision in September to withdraw from a planned $1.5-billion venture-capital fund with PCCW. Earlier, GigaMedia said it would no longer participate in a project to develop Chinese-language Internet content, although PCCW and the third partner, ERA Communications, are going ahead. On Oct. 4, GigaMedia announced an alliance with STAR TV, which Li originally formed and then sold to Australian media mogul Rupert Murdoch.

The PCCW chairman is understandably concerned about the bad publicity. When rumors circulated that CMGI might pull out of yet another venture with PCCW, he went to great lengths to dispel the notion. At a Sept. 28 meeting with analysts to announce PCCW's interim results, he took the unusual move of ringing friend and CMGI CEO David Wetherell in the U.S. and putting the sleepy executive on a speaker phone to field questions. There were none, leaving Wetherell to assert that his company remained committed to Asia and to its partnership with PCCW. Li reminded the audience that the Massachusetts-based investment group had acquired $500-million worth of PCCW shares from Cable & Wireless in August.

For the market, yet another source of unease is the lukewarm reviews for PCCW's Network of the World (NOW), the company's flagship broadband content provider that was soft-launched in July. NOW currently beams streaming videos of sports and other entertainment programs to computers worldwide and to a cable-TV operator in Hong Kong. "It's a joke," says a Hong Kong-based senior executive at a competing IP backbone company. "How can PCCW compete with established content providers like Time Warner and Disney, once those companies begin producing broadband-ready materials?"

But PCCW remains committed to spending $1.5 billion on NOW over five years. "Having content without distribution is worthless, and having distribution without content is worthless," says Bowden. "There is no portal player and no other company in the world that is producing more broadband content than we are. We're it." He points out that the merged PCCW has more than 150,000 broadband customers in Hong Kong — while American companies boast a total of 250,000 broadband users in the U.S. "We understand how to provide broadband services and we have a great laboratory for delivering them," says Bowden. "Asia is the most advanced area of broadband penetration in the world and that's where we're going to be distributing NOW content."

The feeling inside PCCW is that better marketing is needed to help change perceptions. The company is currently running an unmemorable television and print ad campaign. That may change with the hiring of image advisers Interbrand. Tokyo-based Briton Brendan McMahon, who is overseeing the strategy review, and American Richard Stein, who is in charge of overall corporate image design, have been commuting from Japan to Hong Kong for nearly six weeks. They have a November deadline for a project that normally takes six months. "Everything is on the table," says Stein. "We're here to develop the voice and image of PCCW — there will be symbols, logo types, devices, and a tone and voice in all their communications. We're supposed to make order out of this chaos and leave room for things to happen in the future."

Still, no amount of spin is likely to change the minds of persistent critic David Webb, whose service promotes corporate governance and transparency. "The market is finally reverting to rational analysis," he says. Webb places PCCW's fair value at HK$6 a share, mainly because of the 75% residential component of the Cyberport project. "Although the value of PCCW's Internet holdings has fallen further, the outlook for the residential market has improved slightly," he wrote recently. Former HKT majority owner Cable & Wireless reportedly sold 5% of PCCW — it ended up with 20% of the company after the merger — for less than HK$10. It has said it plans to sell half of its holdings in the near future, a prospect that continues to weigh down PCCW's stock.

Li is not saying how much he thinks PCCW is worth, but he questions the low valuations. "I have a hard time understanding that the hopes were so high at the time [PCCW launched its acquisition bid for HKT] and now they're so low. That's a bit ridiculous, isn't it?" Perhaps he can take comfort in the words of one of his advisers. At 68, former Hong Kong government official Augustine Chui Kam looks out of place in PCCW's college-dorm atmosphere. "I would be understating the future if I said there would be no problems ahead for us," says the company's self-styled "old-economy conscience," who is a friend of Li Ka-shing. "But let's not mince words. This merger takes guts." Now Li Junior needs to prove that he also has the maturity and vision to build a company.

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