Chapter II - Roxane
Aliquando et insanire jucundum est.
(It is sometimes good to be a little crazy.)
Seneca, De Tranquillitate Animi ad Serenum
The July 3, 1986 announcement of the agreement between CGE and ITT created a stir, notwithstanding the fact that a lot of rumors had developed over the preceding months anticipating its happening. People were surprised by the audacity of seeing a French company (especially a nationalized company) dare to acquire one of the jewels of the powerful American economy. What was particularly disturbing was the date of the announcement, coming as it did exactly on the day prior to the new government's launching of its nationalization plan.
It was the happy outcome of two years of efforts, in fact intense negotiations taken in many directions by Georges Pébereau and his staff. For example, in the summary of decision of the May 23, 1985 CIT Alcatel Management Committee meeting (held biweekly), under the heading International Negotiations – Actions to Undertake, the names of AT&T, ITT, Plessey, Italtel, SEL, TRT and Wang can be found. Other names can be found in the minutes of earlier and subsequent meetings. In this plethora of contacts, in order to fully understand the nature and breadth of the agreement with ITT, as well as the context in which it came about, it is necessary to keep in mind the different attempts that had preceded it.
After the 1984 acquisition of Thomson’s telecommunications and cable activities, CGE had approximately doubled its size in the telecommunications market but remained a mid-level player on the world market. At the time everyone in the business focused on switching, and often people only thought of switching when they spoke of telecommunications. This supremacy of switching came about certainly for technical reasons, perhaps for historical reasons, and definitely for human nature reasons.
My first contact with the telecommunications world came through my involvement with cables—distribution cables involving simple technology as well as long distance ground cables, coaxial and then fiber optic, and undersea cables. It was through my cable experience that I first discovered the world of transmission—its highly technical nature and the personal qualities of the specialists in that field, whether they are with the operators or the suppliers. This was particularly evident in the world of undersea telecommunications cables. It is, without doubt, for that reason that I never understood the pre-eminence of the people in switching over those in transmission. But I had learned long ago that there’s no point in going up against the vanity of the hierarchy that a company establishes among its professionals. It’s better just to go along. But I never forgot the importance of transmission or of cables and, as will be seen, a number of times negotiations directed towards switching objectives, after being blocked by the intransigence of the parties, were often relaunched by adding a transmission aspect.
It was, therefore, natural, in seeking to enlarge the switching activities of the group, that we looked at nearby competitors, which explains why numerous meetings were held with the British company Plessey, the Italian company Italtel, occasionally with Siemens and occasionally with two or three together under the cover or pretext of common European programs. Despite the time spent and numerous developments, no serious plan of cooperation emerged. Each tried to consolidate and protect its position on its national market against foreign competition. They did this in complete complicity with the network operator of their country, which was itself sheltered by its monopoly. In Europe there were few companies with subsidiaries outside their home country (the only exceptions being Ericsson and ITT); but these companies could extend their influence beyond their home countries by entering into licensing arrangements.
At that time the challenge for each manufacturer was to perfect its digital switch, the new technology which would, in the years to come, supplant the electromechanical, and even electronic, equipment. CGE was clearly ahead of its competitors at that time—the E10 switch (Version A and especially Version B) was in service, while among its competitors the digital switch was still under development or in a trial phase. Without question, digitalization of the French network was, at the time, much more advanced than in the foreign networks. But none of the competitors were ready to renounce their technology; and this nationalism of the manufacturers was fine with the network operators, who, as a result, were able to have equipment made in accordance with their own procedures, practices, and even fantasies. It’s amazing how each of the major European countries strived hard and finally succeeded to slow down the digitalization of its network, as long as it retained at least one national source for the manufacture of this equipment.
CGE also tried to negotiate—and, I should say, to renegotiate again—an agreement with the Philips group because periodically representatives of the two groups met but always without concrete results. In this case the discussions were extended right away to the transmission and fiber optic areas. Philips had a particular manufacturing process for fibers not that much different from the one perfected by CGE’s laboratories. But at the time the principal obstacle to an agreement was Cornings' patents, even though CGE was one of its licensees. The negotiations ended in an impasse.
CGE was more motivated in the field of transmission by microwave. CGE had just bought this technology from Thomson; and in France the major competitor was TRT, a Philips subsidiary. CGE’s desire to acquire TRT was matched only by TRT’s determination to preserve its independence and to continue to capitalize on its excellent position with respect to civilian and military microwaves. It’s easy to understand that the chances of moving ahead were small.
However, at the international level Philips had joined with AT&T with respect to telecommunications (to form APT). It was the beginning of a process which would lead years later to the complete withdrawal of Philips from telecommunications. At the time, that joint company (APT), the party with which we were dealing, had difficulty committing, especially since the interests of AT&T itself were at issue.
Nonetheless it was APT that CGE chose as its principal target. The European telecommunications equipment companies had always sought the acceptance of their technologies by gaining a part of the U.S. market, a market which was immense, closed and dominated first by AT&T and, secondarily, by the Canadian company Northern Telecom. CIT Alcatel had courageously undertaken (and, it must be recognized, strongly encouraged and financed by the PTT—specifically, the DGT, general management of the Telecommunications Agency, which later would become France Telecom) to perfect an American version of the E10 switch. It was the E10-Five, a version of lesser capacity than the French version, designed mainly for small independent operators (that is, independent of the telephone companies emerging from the break-up of AT&T). CIT employed a staff of several hundred engineers at Reston, outside of Washington, D.C., to assure this development and after several years of effort the results were meager. The difficulty of transposing the French system to American technical norms and the specific operations particular to the North American operators had been underestimated. A number of telephone exchanges representing several tens of thousands of lines had, nevertheless, been sold.
To facilitate the introduction of the E10-Five in the United States, CGE hoped to get the support of AT&T. To entice AT&T, CGE proposed to help AT&T get accepted as the second supplier in France. This scheme could appear surrealist today. To understand the manoeuvre, it must be remembered that at the time CGE was nationalized and there was total confusion over the division of responsibilities between the government and industry. The government didn't hesitate to devise plans for mergers, the withdrawal of companies from markets and to divide markets among various industrial concerns, and in the same way an industrial company did not hesitate to put into play a competitor's part of the DGT market. It is true that at the time CGCT, with 17% of the DGT market (with 83% for CGE after the CIT-Thomson merger) was in difficulty. CGE, therefore, proposed 17% of the French market in exchange for AT&T’s support for equivalent sales of the E10-Five in the United States.
The deal involved microwave activities. There the structure appeared more realistic: Philips (that is, TRT) and CGE would merge their microwave activities and create a joint venture company in France. AT&T agreed to purchase from that entity all its requirements of new generation microwave equipment for the U.S. market.
Despite all the obstacles put up in France by TRT and the reluctance in the United States of AT&T to agree to purchase the E10-Five, an agreement in principle was finalized in June 1985 and presented to the French authorities. It should be mentioned that the government had been kept up-to-date on all developments of the negotiations. Nonetheless, there were more lengthy discussions and, ultimately, Edith Cresson, the Minister of Foreign Trade and Industrial Redeployment, indicated, by letter dated December 11, 1985 addressed to the chairman of AT&T, that she would accept the continuation of negotiations and that a final agreement be presented. She further indicated that in order for the agreement to be susceptible of obtaining French Government approval, it had to provide a satisfactory solution with respect to technical, financial, industrial and employment aspects. Talk about a real challenge!
Nonetheless, we recommenced our talks, which this time would take us from Holland to New Jersey, where AT&T had its headquarters.
AT&T became more and more reluctant to make precise commitments concerning the E10-Five and it was correctly pointed out that the antitrust authorities could perhaps raise objections due to the true relationship between AT&T and CGE implied in the agreement, if it should succeed. CGE and AT&T would be the only two competitors on the French market, at a time when they were also operating jointly on the U.S. market. In addition, CGE was becoming more and more aware of the difficulties that needed to be overcome to render the E10-Five competitive in the U.S. market and began to ask if such a costly program should continue to be pursued.
To avoid a total collapse of the deal—because in the meantime AT&T had become very insistent on entering the French market—we dedicated a series of meetings in the spring of 1986 to establishing a variant to the agreement concerning the United States. We didn’t talk anymore about the E10 and instead shifted AT&T's commitment to the transmission area—namely, to purchase ground stations (equipment enabling communication with telecommunications satellites) from Alcatel, for $100 million over four years, and to contribute up to $30 million to finance the adaptation of that equipment to the U.S. market.
The rest of the agreement remained unchanged. AT&T would make its microwave technology available to the future French subsidiary and would make an irrevocable commitment to buy, over an initial period of four years, a minimum of $200 millions worth of equipment destined for the American market.
The entering into effect of this agreement in June of 1986 was, of course, subject to approval by the French authorities of the agreement entered into at the same time between APT and CGCT, as well as to the decision to entrust in CGCT orders for AT&T’s switching system, the ESS5—PRX.
Thus, in the beginning of July 1986 the French government had before it requests from CGE for two telecommunications transactions. However, the one with AT&T had been overtaken, and was about to be eclipsed, by the one with ITT.
The agreement with ITT was the result of a lot of time and energy. Its preparation took over a year and required the efforts of many people on both sides. It was agreed that we would make every effort to keep the discussions secret. The acquisition was assigned the code name “Roxane.” I don't know why this choice was made.
Roxane, the daughter of Satrap of Bactriane, was captured by the Greeks. Alexander the Great married her and they had a son, Alexander IV, who would become King of Macedonia. However, Roxane was captured with her son in Pydra by Cassandra, and both were assassinated.
With the passage of time the choice of that name appears loaded with symbolism. Did one intend to make reference to the capture of Roxane by the Greeks, or more indirectly to her father, the Satrap, a function which in literature is associated with a life of great luxury and a despotic authority? Or, to the contrary, was it hoped in the future to avoid the disastrous outcome for Roxane, as well as for her husband Alexander IV, whose empire was carved up by his successors?
The negotiations concerned significant operations that were to be merged. Investment bankers were involved on behalf of each of the parties.
ITT was the second largest telecommunications supplier in the world with $5 billion of sales—75% in Europe, 16% in the United States and 9% in the rest of the world. Public switching, which accounted for half of total sales, covered almost all of Europe, with two-thirds of its sales in four of the large countries—West Germany, Belgium, Italy and Spain. It appeared, therefore, perfectly complementary to Alcatel.
As for CGE, Alcatel had become the fifth telecommunications manufacturer worldwide with $3 billion in sales, mostly in the French market and exports from France.
The motivation of CGE, by making an acquisition that would place it second in the world, was to give it sufficient size to have the means to finance the enormous research and development that was necessary in this industry. Even though the plan appeared enticing in theory, it was necessary to ensure that the numerous questions that it raised were answered satisfactorily.
On the technical side (and here we were speaking primarily of switching), ITT was having difficulty completing the development of its new S1240 switch and its development program was experiencing significant delays. The S1240 had an entirely new architecture with a decentralized logic processing. This was quite different from the designs of the E10 and the systems of the other competitors—AT&T, Siemens, Ericsson, etc. For that reason, Alcatel’s evaluation of the actual state of development of the system took on great importance during the early months of 1986. The only telephone exchanges in service were connected to several thousand telephone subscriber lines (compared with 10,000, at a minimum, for competing systems) and their capacity to assure a high flow of calls (as measured by the response time) was limited. Moreover, ITT had just stopped the development of the system which it had designed for the American market.
Technical discussions were courteous, but we sensed the reluctance of ITT engineers to respond to questions posed by CIT Alcatel, which remained, at least for the time being, a formidable competitor. At any rate, the Alcatel team responsible for evaluating the S12, and which I was designated to lead, concluded, in April of 1986, that the difficulties which had delayed the putting in service of the S12 and limited its functionalities, were, in fact, in the process of being overcome, and the risk of new delays appeared minimal. That opinion was contrary to the opinion of everyone else in the business; however, it turned out to be correct. It was in that light that CGE pursued the negotiations despite the doubts about the system S12—which didn’t go away but, in the end, helped CGE in the final price discussions.
The second concern involved the real profitability of the telecommunications activities. A complex system of management control inundated us with figures, and it required a lot of time and effort to arrive at our conclusion: The average profitability was small; with respect to certain subsidiaries it was uncertain; others, particularly in the U.S., were showing losses.
The third concern was to assure that the share of the various national markets covered by ITT subsidiaries would be preserved when the entity fell under the control of CGE. It was again a question of market share with respect to switching. The appetites of our competitors were naturally going to be stimulated.
In Germany, Siemens was ready to accept CGE control of SEL but wanted access to the French market for its products, for which CGE promised its support. (The confusion of responsibilities between governments and nationalized companies must be kept in mind.) In Italy, Italtel, a state-owned company, counted on benefiting from the change in stockholding to reduce the market share of ITT’s subsidiary FACE and, especially, to enable Intatel to complete its plans to absorb Telettra, Fiat’s telecommunications subsidiary. In Spain one of the shareholders of SESA (ITT's subsidiary) was Telefonica, the government-owned telephone company. Telefonica wanted to benefit from the change to respond to the lures of AT&T. Even in Belgium the jewel of ITT’s subsidiaries—Bell—showed the reluctance that Belgian companies had towards French investors.
It was to respond to these concerns as much as to reduce the cost of the acquisition that CGE came up with the idea for a two-level financial arrangement. The joint venture (JV), which would regroup the telecommunications activities of ITT and Alcatel, would have two shareholders—ITT and a “European holding company” that would be called Eurotel.
CGE offered to certain European shareholders the opportunity to invest in Eurotel, promising each the opportunity to participate in the management. La Société Générale de Belgique was the first partner and held to its commitments up until the creation of Alcatel NV. Telefonica promised to participate if paid a license fee (the details to be worked out) for its expertise as a network operator. The British company Plessey, the German company Bosch, and others indicated potential interest, but no firm commitments had been made by the end of June 1986.
CGE nonetheless signed a very restrictive agreement subject only to the approval of the French government, which had to be obtained by July 31, 1986. The final contract was to be signed before December 31, 1986.
Under the terms of the agreement ITT would contribute to the joint venture company all of its telecommunications activities with a value of $2.8 billion. CGE would contribute all the activities of Alcatel and its subsidiaries with a value of $1.4 billion, an amount appreciably greater than its market capitalization at the time ($800 million). ITT would obtain a 30% share in the JV. To arrive at a 70/30 split, $1.8 billion would be paid to ITT. Of that amount, $350 million would be paid by the JV. ($350 million was the amount that ITT had previously loaned to its subsidiaries which were entering into the JV.)
CGE and its Eurotel partners would therefore have to pay ITT $1.45 billion. At the time CGE thought this money would come from the following sources: $450 million from partners ($300 million from Générale de Belgique and $150 million from the other European partners); $450 million from financial investors (such as insurance companies) which hadn't yet been approached; and $550 million from CGE itself. This allocation would give CGE the control of Eurotel, with 69%, but in consolidated terms only 48% of the JV.
The activities of ITT concerned by the project had been only somewhat profitable in 1985 ($25 million). We anticipated the need for significant restructuring to improve productivity and to benefit from the synergies expected to come out of the venture with Alcatel. That effort would extend over several financial periods and its cost alleviated in part by a price increase in France (to prices agreed to by the DGT, but still lower than the prices in other European countries). The price increase would give Alcatel another means of self-financing $500 million over four years. In this way the consolidated results for the new entity could increase to as much as $250 million in the first few years.
ITT and CGE officially announced the conclusion of the agreement by a press release published on July 2, 1986 which generally outlined the project without being explicit on the details concerning the financing structure. There was an immediate gush of commentaries from the press. They hailed the boldness of the challenge that CGE was ready to take on to become the second worldwide in telecommunications while, at the same time, pointing out the risks and uncertainties.
Headlines in La Tribune de l’Economie read: “CGE-ITT: An Enormous Industrial Gamble” and “CGE-ITT: A Promising Union.”
Le Figaro wrote: “Alcatel: The March Towards Second Place Worldwide. The Alcatel-ITT agreement will no doubt speed up CGE’s privatization. As for CGCT, there’s nothing to prevent it from becoming a subsidiary of the N° 1 worldwide, AT&T.”
The Financial Times:
“CGE to Seek More Partners for ITT Deals.”
“A Bold Step for Europe”
“Britain Faces Changes as Competition Bites.”
“Belgium Expects to Keep Pivotal Role."
Le Journal des Finances : “Acquisition of ITT’s Telecommunications Activities : An Opportunity for France not to be Wasted. While the project with AT&T has not yet been given the green light, a new chance at internationalization is offered to the CGE group."
Le Monde: “CGE-ITT: N° 2 Worldwide in Telecommunications. French public authorities approved publication of the press release."
Le Matin: “CGE-ITT, a Giant to be Born. Will the government say ‘yes’?"
L’Humanité: “CGE-ITT Agreement—Americans pulling the strings.”
Le Quotidien: “CGE plugs into ITT.”
Libération: “Combination ITT-CGE for European telecommunications. The Behn brothers are turning over in their graves: ITT no longer counts on the telephone which was the backbone of the company at the time of its creation by the Behn brothers.”
Le Monde Informatique: “CGE-ITT: Double or Nothing."
Le Canard enchaîné: “A 200 billion dollar phone call. The head of CGE doesn’t have the means to pay for ITT’s telephone subsidiaries, but he dreams and wishes to force the hands of Chirac and Balladur.”
Le Nouvel Observateur: “Dangerous Affair: The CGE-ITT telephone agreement is so colossal that the government asks itself whether the bride isn’t too beautiful.”
Le Journal des Finances:“CGE-ITT: Will the Europeans join the venture?
Minute: “Not a Very Reasonable Union”
The announcement of the agreement received a cool welcome by the government. It feared that CGE didn’t have the human or financial resources to take on this challenge. The rise in value of ITT stock on Wall Street (up $4.25 to $57.25) after the announcement of the agreement increased their doubts. But the government’s reservations resulted especially from the fact that the date for its decisions on privatization was drawing near. Concerning the agreement, “My only problem is that I am the owner of CGE,” commented Alain Madelin, Minister of Industry; comparing CGE to an apartment, he added, “and this apartment, I am preparing myself to sell it because we are going to privatize state-owned companies.” He then indicated that the public authorities were reviewing the agreement to see if it would "disturb the sales process or, to the contrary, give value to CGE."
That was, in effect, the essential question to which I would have to respond immediately after taking over as head of CGE on July 24,1986. I only had eight days within which to do it because ITT refused to postpone the July 31 deadline. ITT was undoubtedly mistrustful as a result of the sudden removal of Georges Pébereau (the chairman under whom the agreement had been prepared) from his position and because they probably had maintained contact with Northern Telecom, which had been a candidate for the acquisition in June.
Here I was then, without being able to step back and take more time to reflect, required to make a critical decision concerning the future of the group. The stakes seemed enormous, and the risks as well. Fortunately, I had participated in the negotiations during the last months, particularly with respect to the analysis of the technical and commercial advantages and risks associated with the acquisition. So, fully recognizing the oversimplification that would be required to make my decision, I decided, after consulting with the negotiating team, that it was necessary to try to conclude the agreement, after improving it with respect to at least two points—two points which were, in fact, contradictory: It would be necessary to reduce the financing burden for CGE and to modify the capital structure so CGE would, without question, have control of the JV and be in a position to rapidly make the difficult decisions that I sensed would be required.
I conveyed my position to the government. The first response was abrupt: If you conclude the merger, the risks are such that CGE undoubtedly will not be in a position to be privatized for two years, at a minimum—that is, before the stock market becomes reassured by the publication of financial results showing that the venture was a success. My response was no less immediate and clear. If I had to chose between the acquisition and privatization, I would choose privatization. The merger of the telecommunications activities of CGE and Thomson, barely concluded, had left a bitter taste in my mouth because I had lived during two years immersed from head to toe in the difficulty of managing a project of such magnitude in the public sector, where the sale back to the private sector of such-and-such activity or company remained problematic.
The government gave me 48 hours to think it over. I confirmed nonetheless my position, adding that if the agreement was accepted, after privatization CGE's capital should be increased because the group needed to take advantage of its return to the stock market to bring its debts down to a reasonable level after the acquisition. For our contacts in the Finance ministry, this demand did not enter into the plans they had prepared for the privatizations and was an additional reason—and perhaps sufficient in itself—to set aside the privatization of CGE.
There was another adjournment and then a third meeting which, this time, would be decisive. CGE was authorized to sign the agreement if ITT accepted to raise from 30% to 37% its share in the JV (and, thus, the cash payments would be adjusted accordingly). CGE alone would have to assume the risks and the DGT would not help by allowing an increase in prices charged on the French market. CGE would be privatized rapidly, with an increase in capital if the financial markets permitted it.
ITT accepted rather easily to increase its participation in the JV to 37%. The government made known its approval by a very reserved statement from the Minister of Industry and PTT, Mr. Alain Madelin, “The French government is not opposed to the agreement concluded between CGE and the American group ITT, providing for the regrouping of their activities in the telecommunications field.” The press translated that statement as: “CGE-ITT: oui du bout des lèvres” (Yes, from the tip of the lips—that is, without enthusiasm or commitment). (Le Quotidien); “Madelin: Okay to proceed.” (Liberation) ; and “CGE gets a green light from the government but no assistance” (Les Echos).
But again reservations were expressed publicly, notably by Louis Mexandeau, Minister of the PTT until March 1986, who stated: "The unification of the Alcatel operations subsequent to the merger with Thomson Telecommunications has not yet been completed. Can one, with impunity, add, to the (Thomson) MT and to the (Alcatel) E10, ITT’s System 12, which is not yet technically ready.” The former minister, while recognizing that the undertaking was very “seductive,” expressed nonetheless “strong reservations” regarding the joint venture. He found the cost “abnormally high,” 40 to 50% too expensive. He preferred the CGE-AT&T arrangement. His reservations were echoed by the press. “ITT-CGE: The Agreement’s Financial Risks” (Libération); “A Risky and Costly Deal: CGE Becomes N° 2 Worldwide in Telecommunications” (Le Monde); “Telecommunications: The third wager CGE-ITT: The Government isn’t opposed to the union but doesn’t put a penny in it” (Le Point).
These criticisms weren’t completely without foundation and, as I had concluded from the beginning, it would now be necessary to improve the agreement on certain points. Our negotiating possibilities were restricted because we were limited by the December 31, 1986 deadline and the June 1986 text which had been signed was rather precise.
I worked hard to obtain clear commitments from the European companies which had been approached to participate in Eurotel. La Société Générale de Belgique confirmed its undertaking. Telefonica, on the other hand, increased its demands for compensation and with respect to management and the making of important decisions. It quickly became clear to me that it wouldn’t be possible to arrive at an agreement within the time required because another very difficult discussion with Spanish authorities appeared urgent. ITT’s Spanish subsidiaries, in which Telefonica held a percentage interest, had huge overstaffing problems. ITT hadn’t been able, up to this time, to reach an agreement with the Spanish authorities to clean up the situation. We could not take those operations over from ITT under these conditions because the losses would have been unsustainable. It was a real stumbling block which put the whole deal at risk. In fact, it was only in the final days of December that an agreement in principle was concluded between the parties—Spanish government authorities, ITT and us. A very expensive human resources plan was accepted and certain subsidiaries with marginal activities were withdrawn from the scope of the agreement and sold to third parties. But there would be developments the following year.
Eurotel wasn't able any more to count on contributions from other European companies which, it seems, had demonstrated more curiosity than interest in the project. Even if the amount payable to ITT were reduced to $1.180 billion for 63% of the JV, CGE's share (considering no contribution from the other European companies) would be as much as $800 million, without taking into account the future capital needs of the JV. This was a significant sum even with the prospect of a future recapitalization.
We therefore proposed to ITT to extend the agreement to the cable and fiber optic activities of the two groups. In those areas CGE had more activities than its negotiating partner. That addition could, therefore, reduce the financial cost to CGE while at the same time increasing its level of control over the whole. There was also a solid commercial justification for the proposal. The justification was obvious with respect to telecommunications cables, which are components of transmission systems and are sometimes very closely linked to electronic equipment, as is the case with undersea cables. The justification existed also in the field of power cables, where, for very high tension cables and especially for undersea connections, ITT’s Norwegian subsidiary and Les Câbles de Lyon were two important suppliers in the world market, and were in fact very often in head-to-head competition.
That modification of the agreement was easily negotiated and an amendment was signed on October 29, 1986 providing that CGE would also contribute to the JV 65% of Les Câbles de Lyon and ITT would contribute its U.S. fiber optic activities and its electronic relay activities (an electro-magnetic component which was involved in the fabrication of switches and which were produced by two Europeans subsidiaries, SEL in Germany and STR in Switzerland).
Additional negotiations would be necessary to finalize the agreement. ITT’s 24% share in the British company STC, for example, presented a problem. STC, a specialist in transmission in the British market, interested the JV because of its rank in the British market where the JV was practically absent, but especially for its undersea cable activities, where STC was, like CGE, one of the four manufacturers in the world. But STC was the parent of the computer company ICL and the two together came across as a high-tech group, a national champion in its field, which couldn’t fall under foreign control.
STC participated, even though ITT’s share in the company was only 24%, in the group’s research pool. Under this pooling arrangement all the research and development results from ITT's telecommunications activities were put into a common pool. Each member of the group paid a royalty based on the amount of its sales and in return had access to all the technology in the pool. I found STC's participation in the pool to be particularly troublesome because it permitted know-how to escape to a company which was not controlled and which was a serious competitor in certain areas.
Not being able to obtain an increase in the percentage of ITT’s share in STC, ITT’s holdings in that company were withdrawn from the scope of the agreement and the research and development pooling arrangement with STC was terminated. ITT sold its STC shares to Northern Telecom, which subsequently acquired complete control of the company. (As will be seen later, STC would meet up with the JV again in 1994, this time to conclude an agreement.)
The accounting work necessary to finalize the agreement uncovered other problems. The profitability of many of ITT’s subsidiaries deteriorated as the months passed. In comparison with the financial statements on which the June agreement was based, the 1986 profit projections for all of the subsidiaries taken together went from $88 million to $56 million. Even though the decline in profits in Spain didn’t surprise us, it represented only one-third of the total decrease in profits. The negative result in several subsidiaries presented a problem—not so much for the final level of the 1986 results because, under the agreement, the figures would be adjusted on the basis of year-end financials—but because of the doubts it shed on the true condition of the subsidiaries, as the responsibility for them would be turned over completely to the JV the following January 1.
This additional information made it even more necessary to avoid any wavering in the management of the companies that ITT would contribute to the JV. The risk was great. The large subsidiaries had strong national management teams. The smaller ones relied more on the home office, ITT Europe for the non-American subsidiaries. This office, located in Brussels, employed over 480 people, mostly Americans, who didn’t anticipate reporting to foreigners. Their motivation to prepare for the change wasn’t very great, nor even to ensure management during the rest of the second half of 1986.
It was necessary, therefore, to involve ourselves in the functioning of this group as early as September 1986, which later proved to be beneficial. To be fully operational on the first of January 1987, we had to organize the new management team, the new structure, and new administrative, legal, financial, technical and commercial policies without waiting for the signing of the final agreement
It was in this way that I became familiar with the internal workings of ITT, its meticulous, exacting and detail-oriented approach, its vanity and its red tape, but also its professionalism.
Rand Araskog, the chairman of ITT, invited me, for example, to a meeting of the management of ITT Europe on September 25. The meeting was held, as was the custom, in a huge meeting room on the top floor of the ITT Tower in Brussels. Around the central table were two representatives of CGE (myself included), lost among the 56 senior managers from the Brussels headquarters and subsidiaries around the world (except the U.S. managers who reported directly to the headquarters in New York). At the center of the table, facing the armchair of Rand Araskog (I was at his right) were two clocks. One indicated local time; the other, New York time. The meeting was held at 1:00 pm European time, but it was said that when H.S. Geneen presided over ITT, this type of meeting was held on New York time.
ITT made a presentation which was favorable for the future JV, its products, and its markets highlighting the synergies and how the ITT and Alcatel operations complemented each other. Afterward, each subsidiary president was invited to speak and to comment, in particular, on the reaction of his company's customers and competitors. All of them were new to me; yet I was going, during the years to come, to live with practically all of them the exciting Alcatel adventure. But on that day the personality of each was revealed by his remarks.
For example, for the chairman of the German company, Dr. Helmut Lohr, the principal question in switching wasn’t the problem of internal competition between the E10 and S12 but the opening of the French market to Siemens' products.
Miguel Canalejo, chairman of the Spanish subsidiary (which I knew was in real difficulty) insisted not on the problems that his company was experiencing, but on the necessity that the JV management be European and not French.
Umberto Ferroni, chairman of the Italian subsidiary, pointed out the risk of losing market share, but he thought it was possible to avoid it.
The American representative, who spoke for the Taiwan subsidiary, indicated that it was urgently necessary to decide which product would be sold in Taiwan (which followed American norms) after termination of the development of the American S12 at the beginning of 1986.
Gerald Page-Hanify, head of the Australian subsidiary, was happy that the Alcatel-ITT merger was being carried out in an amicable fashion, in comparison with the hostile takeover bid launched by GEC against Plessey in Great Britain. He added that CIT Alcatel was looked upon favorably in Australia thanks to the sale of its DPS25 packet switch to the complete satisfaction of the national operator. He concluded that the JV should be well received in Australia.
The following October 21, I discovered another facet of ITT when I was invited to present CGE at the annual conference of 300 to 400 ITT managers from all over the world representing the full range of ITT's businesses. The conference was held in Massachusetts at the Club House of a magnificent golf course owned by ITT. I received a very friendly welcome which, after many other contacts, I found encouraging for the task of putting into place the JV organization for the impending January 1 deadline.
At the autumn International Telecommunications Union (ITU) meeting, which was held in Nairobi on September 18 and 19, 1986, the ITT delegates and I had to give an impromptu presentation of our commercial policies to an audience of major customers who had come from many countries around the world to participate in the conference.
At the same time that we were finalizing the agreement, it was necessary to put together the organization and choose the people who would manage the new company.
The persevering work of all members of the negotiating team enabled us to overcome, one at a time, all the difficulties and questions and to sign the final agreement on December 30, 1986, within the time frame fixed six months before. It was a magnificent result but a tremendous ordeal, and what a challenge awaited us for the years to come.
The final agreement between CGE and ITT differed substantially from the one that had been signed six months earlier. It included the cable and fiber optic activities, but not the 24% participation in STC. The total value of assets contributed was $4.378 billion instead of $4.2 billion. The financial structure had been simplified—the European holding had been eliminated and the JV, christened temporarily Teleglobal, which would be incorporated in the Netherlands, would have as stockholders the CGE group for 55.6%, ITT for 37%, Société Générale de Belgique for 5.7% and Crédit Lyonnais for 1.7%. The CGE group would thus have direct control of Teleglobal and a majority shareholding, whereas under the earlier plan it would have had a minority participation. Under the final structure it would be easier to make and have approved the weighty management decisions to come.
Because of the changes in the make-up of the assets, the amount paid to ITT in connection with the transaction was reduced to $899 million, to which would be added the reimbursement by the subsidiaries of their debts owed to ITT. After deduction of the contributions by Société Générale de Belgique ($250 million) and Crédit Lyonnais ($75 million), the net amount payable by CGE was $574 million.
The transaction was very complex and is presented here only in a summary fashion. A more detailed and accurate description is provided in the Appendix.
This agreement was to be officially announced in Brussels on January 7, 1987 by Rand Araskog and myself. It resulted in the creation of a new N° 2 worldwide in telecommunications and a new N° 1 in cables, with total sales of 82 billion francs, 160,000 employees, and subsidiaries in 75 countries.
With the announcement the press reiterated the themes which had already been developed:
“CGE-ITT: la grenouille épouse le boeuf (The frog unites with the cow),” appeared in Le Nouvel Observateur.
“L’héritage d’ITT: un trésor de difficultés (ITT’s legacy—a treasure of difficulties)” appeared in Le Quotidien.
“Mégatéléphone’ for CGE” appeared in Les Echos."
But it was perhaps Jean Boissonnat who expressed it best:
"That raises the basic question: Is it a good deal for CGE? The question has been debated for six months. It’s clear that this transaction involves a certain gamble. Does the equipment work? Can the foreign markets gained by the transaction be maintained? When one knows the role played by national governments in awarding procurement contracts, there can always be cause for concern. The cost of the operation is high, about 6 billion francs. CGE will have to borrow a good part.
"But it can’t be said either that when an American company buys a French one, it wins; and when a French company buys an American one, it loses. The truth is that the outcome of this agreement will depend on the quality of the future management of CGE. If it’s rigorous, inventive, dynamic and performs well, all will be fine... It’s simple. There aren’t good or bad companies. There’s only good or bad management. We tend to forget that these days."
That in fact is what would have to be demonstrated. For Rand Araskog, as for myself, the joint press conference on January 7 took on historical importance. He said that for ITT it was the most significant transaction since the 1924 dividing up of the world markets with AT&T. As for me, I presented the organization and announced the name of the new company—Alcatel NV. The company, incorporated in the Netherlands, would have its operational headquarters in Brussels in the “ex-ITT” Tower. Rand Araskog would preside over the supervisory board and I, the board of directors. I presented the composition of the supervisory board, the board of directors and the management of the group. I indicated that in my opinion Alcatel NV would be profitable from its first year of operation and that the net profits could represent 2% of sales.
On this foggy winter morning, as I traveled to Brussels after having appeared on a live 7:00 am radio program on “France Inter” from its regional station in Lille, I considered the breadth of the responsibilities which were falling on me as CGE underwent an enormous change and expanded onto the international scene. As was captioned on the cover page of one of the magazines that week, it was at the same time a “mariage du siècle” (union of the century) and the "naissance d'un géant" (the birth of a giant).
And, inasmuch as good news always comes in pairs, Edouard Balladur, Minister of Economy and Finance, announced the next day, January 8,1987, that CGE would be the next company to be privatized—another challenge to be met.
Naturally, I didn’t neglect to give credit to Georges Pébereau, my predecessor, in connection with the creation of the new Alcatel. At the first meeting, and at my suggestion, the supervisory board unanimously rendered him the following tribute:
"This Board expresses its deep appreciation to Georges Pébereau for his important role in conceiving the idea which led to the creation of Alcatel NV and for the determination and energy he exhibited in making this unprecedented venture a reality."
It was the only just thing to do and was no more than basic courtesy. The reader will see that nine years later, at the time of my departure, the standards had changed!