Eircom unable to break bad news cycle

Any plans that Eircom chief executive Mr Alfie Kane might have to put the group's problems behind him after last week's outpouring of emotion from small shareholders at the annual general meeting seem destined to fail. Mr Kane's heart could only have sunk when Mr Malcolm Fallen, his most senior executive, told him on Monday night that he was resigning to join a smaller company in England.

The news was released to the market yesterday, the latest in a stream of negative announcements. It had a predictable effect on Eircom's share price, which fell eight cents to €2.42.

Mr Kane will no doubt use Mr Fallen's departure to drive home his mantra that Eircom needs a competitive and lucrative executive share option scheme to attract and retain world class staff.

Although nobody seriously doubts Mr Fallen's assertion that he is leaving for family reasons, it is also assumed that he did not have to take much of a pay cut, if any, to do so. Although Kingston Communications is dwarfed by Eircom in size, it is a fast-growing, quoted telecommunications company and presumably pays the market rate. It also has an established share option scheme as well as a long-term incentive scheme.

Mr Ian McKenzie, who was recently appointed chief operating officer at the company, has already been granted options over almost 150,000 shares in the company. Mr Fallen would have had to wait until November for Eircom share options and then only with the associated flak from small shareholders and the media.

The outlook for Kingston's share price is more upbeat than Eircom's as the market regards it as a fast-growing communications company rather than a mature player with a number of technical problems holding back its share price. The two companies are competitors in the UK market and lease lines from Fibernet, the infrastructure provider. Fund managers said yesterday that it was a positive sign that Mr Fallen had left with a new job to go to. "It would have been more worrying if he had just walked," said one institutional investor in Dublin.

Although Mr Fallen said it was not an issue, fund managers believe that the ongoing controversy at the company over the share price and the executive share option scheme must have played a part. "It cannot have helped morale. It's not what you expect when you sign up to be the chief financial officer of a telecoms company," said the manager. Replacing Mr Fallen will be a problem for Mr Kane, even with the help of a share option scheme. Mr Ray MacSharry, the company chairman, told shareholders than only the minimum number of share options would be awarded in November and then at prices in excess of €3.

Eircom share price will struggle to break that level in the short-term unless there is a significant turnaround in the sector. The company is expected to look abroad for Mr Fallen's replacement and its best hope may be to try and attract back an Irish expatriate with experience of the high-technology sector. The company said last night that it had already started the process of finding a replacement for the departing executive.