New 2.5G and 3G technologies may improve the fortunes of former Eircom shareholders who have Vodafone stocks.

For the majority of Irish investors, their only experience in investing in the shares of telecom companies was through Eircom. Indeed, for an army of small private investors, Eircom was their first and only direct purchase of shares on the stock market.

As we now know, Eircom was floated at the peak of the market for telecom stocks and the company found itself operating in a very hostile industry environment. The response of the Eircom board and management was to split the company into two separate companies, namely, the traditional fixed-line business (Eircom) and the newer and faster-growing mobile phone business (Eircell). Eircell was then sold to Vodafone in exchange for Vodafone shares. Eircom retained its stock market quotation but the company now only consisted of the fixed-line telecom business.

Within a relatively short time, this was taken over by the Valentia consortium, led by Sir Anthony O'Reilly, in a competitive bidding war with a consortium led by Mr Denis O'Brien.

Eircom's management was heavily criticised in some quarters for the strategic break-up of the company.

However, the approach of separating the fixed-line business and the mobile business into two distinct companies is one that has been pursued by other companies, most notably BT in Britain.

Of course the key difference between BT and Eircom is that the former was large enough to float into two independent companies. The cash takeover of Eircom by Valentia at least meant that Eircom shareholders retrieved some cash from their original investment and public interest in telecom shares subsequently faded into the background. Even the attempt by Fine Gael to make the losses suffered by small Eircom shareholders into an election issue failed to grab the public's attention. It seems that the large number of small investors who had lost money were happy to let sleeping dogs lie.

However, the majority of investors who bought shares in the original initial public offering (IPO) are still holding the Vodafone shares they received in exchange for Eircell. The Vodafone share price has fallen sharply from the 245p sterling that pertained at the time of the take-over.

However, compared with other telecommunications stocks the Vodafone share price has held up reasonably well. Vodafone is the largest mobile phone operator in the world and is currently capitalised at £85 billion sterling (€140 billion). Despite the current difficult market climate, most investment analysts have remained optimistic about Vodafone's prospects.

The planned introduction of third-generation (3G) mobile technology is expected ultimately to create growing demand for the services provided by Vodafone.

However, a recent report from British stock brokerage house Collins Stewart challenges this cosy consensus.

The report envisages that the Vodafone share price could fall to as low as 73p sterling compared with the current already-depressed level of 128p sterling. Essentially, this bearish outlook is based on a view that the market for mobile phones has reached saturation level in most markets. In addition, it is becoming more difficult for operators to increase revenue per customer.

In this regard, the telecom companies are hoping the introduction of the newer 2.5G and 3G technologies will generate growth. Unfortunately, the date for the introduction of 3G has already been deferred several times, whilst the take up of 2.5G has been disappointing.

The table shows the share price performance for the major British telecom companies over the past three months. Of these, the only company to hold its value is BT, which now consists of the old fixed-line telephone business.

O2 the mobile spin-off, has declined significantly in value in recent months. However, the fall in O2's share price from 88p to 62p seems good compared with the collapse in the Energis share price. The fall in Vodafone's share price has been severe but not precipitous.

For those investors who bought into the Eircom IPO, probably the best option now is to continue to hold their Vodafone shares and to hope that the eventual introduction of 2.5G and 3G mobile technology will be successful.