Chapter IX - The Tarpeian Rock
…et tacitum vivit sub pectore vulnus.
(...and a silent wound lives under her chest.)
Virgil, The Aeneid
During the early 1990’s the economy initially held on, then slowed down progressively and, finally, just about went into recession in 1993. Alcatel Alsthom’s financial situation reflected that evolution, but with a delay of one or two years compared with most companies. That prolonged prosperity for Alcatel Alsthom appeared miraculous and aroused enthusiasm on the stock market for its stock, which, over several months, went from 650 francs to 900 francs at the end of 1993—that is, an increase distinctly greater than that of the CAC 40 index of the Paris stock market.
That appreciation seemed excessive to me, especially in light of the budget estimates for 1994 which were being put together in the various units of the group and then synthesized, as was customary, between September and the beginning of January. I therefore gave an interview to the press on January 12, 1994 in which I announced that the profits to be expected for the year to come would be appreciably reduced compared with prior years (net profit of 7.053 billion francs in 1992 and 7.062 billion francs in 1993), because the crisis was now affecting Alcatel Alsthom’s principal markets, not only France, but Germany, Spain, and Italy as well. “The crisis is not behind us,” I indicated that day. I would confirm that forecast in the middle of the year. The January announcement, an advance profit warning, took the stock market off guard because it was expecting a rebound in the economy which the government had confirmed several days before indicating that France had just come out of its recession. Alcatel’s stock dropped 12% in one day and the Paris stock market by more than 2%, which led Le Journal des Finances to run as a headline on January 17, 1994: “Suard causes a drop in the market.”
The group would face a brutal reduction in the performance of its telecommunications subsidiary in Germany. The volume of orders from the traditional customer was falling and, what’s more, Alcatel SEL was having difficulty satisfying the technological development needs demanded by the German national operator, which resulted in delays and additional costs. The result of that at the Alcatel level was a constant downward reduction of the net profits expected from SEL for 1994. That result, estimated initially as a profit of 91 million ECUs in the budget (that is, in November of 1993) would become a loss of 81 million ECUs when updated in May of 1994, and in November, the last update for the year, the loss was estimated at 250 million ECUs.
In 1994 there was, in addition to the difficulties in Germany, a general reduction in business in the various markets and financial losses at the Turkish and Brazilian subsidiaries of Alcatel as a result of dramatic changes in the foreign exchange rate for the Turkish Lira and the Brazilian Real, which were poorly managed by Alcatel.
The price of Alcatel’s stock reacted brutally to these projections. In January of 1994 the price went back to the 700 franc level; it then went down progressively to 450 francs, and ultimately remained between 400 and 500 francs until my resignation in June of 1995. That significant fall of Alcatel Alsthom’s stock price wasn’t, nevertheless, unusual in the Paris stock market during that year, 1994. Citing only the major companies whose chairmen sat on Alcatel Alsthom’s board, Société Générale’s stock lost 30% of its value that year and the Company Général des Eaux lost 20% over a few months, like the CAC 40 index. It must be added that the price of the Alcatel Alsthom stock was also affected, naturally, by the judicial events during this period. But, and it’s perhaps an indication of the wisdom of the market, every price reduction brought about by media covered events (the reduction was 7%, for example, at the time of my being held for examination the afternoon of July 4, 1994) was corrected in the following days. Even the announcement of the appointment of my successor in June of 1995, despite its favorable reception by the press, didn’t appreciably change the price and in the beginning of 1996 the stock price was at the same level as in the early months of 1995.
Naturally, the weakened performance projected for 1994 and 1995 led to the implementation of a rigorous cost reduction plan for overhead expenses (150 million ECUs for the whole of the group) but with no reduction in research and development expenditures. The plan included, among other measures, an exceptional (but evidently temporary) measure: A ban on all new hiring of administrative personnel, except for exemptions granted by the senior management of the Alcatel group. In an environment traditionally very decentralized and a group also very large, that decision was naturally of a symbolic nature designed to reinforce the awareness of the managers to the company's problems. A few contrary-minded people, unfortunately in the communications function, found it disturbing and informed the press, certain segments of which developed a campaign of systematic attacks against the group concerning the "affairs." The media ridiculed the measures taken.
Alcatel Alsthom was, all the same, prepared and mobilized to get through this period of business downturn which mainly concerned the telecommunications sector. In addition to the general causes, there was, with respect to traditional customers, the irresistible movement toward privatization in the developed countries, which led each of the public operators to manage or prepare for its privatization. Often the operator would reduce its investments in order to limit the amount of debt on its balance sheet (which the operator would have to present to the financial markets).
Despite these unfavorable circumstances, the results for Alcatel Alsthom were very good, especially when compared with those of other French companies at that time. The operating margin was 8.042 billion francs, and five years later that level had not again been equalled by the group (which had become Alcatel). In 1994 the net profit was 3.62 billion francs—that is, a profit level close to the highest that year among French companies; and it would have even been the best if Ambroise Roux hadn’t pressured the board to take a restructuring charge arbitrarily fixed at 300 million francs. Remember that the finalization of financial statements and these decisions of the board took place after I had been prevented from managing the group.
As will be explained in the next chapter, judicial decisions led me to leave my post as chairman of Alcatel Alsthom in June of 1995. In fact, it was on March 10, 1995 that the investigating judge banned me from working for the group. The board had to find a temporary solution for my replacement and Marc Vienot, chairman and CEO of Société Générale, who also sat on the board of Alcatel Alsthom, was, after several weeks, designated to be the chairman.
He had to take on the day-to-day chairman functions and prepare for exceptional decisions—that is, put together the financial statements for the end of the 1994 fiscal year and conduct the search for a new chairman.For that second mission, which was completed quickly, it later appeared to me that he had renewed and concluded contacts which had been initiated several months previously.
The board had, during 1995 and the beginning of
1996, to come to a decision several times, as was customary, regarding the
financial statements of the group. But the difference here was that, even
though the successive documents were prepared by the same team of controllers
and supervised by the same auditors, they were presented by a different senior
management. Marc Vienot finalized the financial statements for the 1994 fiscal
year in April of 1995 and my successor as chairman finalized those for the
first half of 1995 (in September of 1995) and then those for the complete 1995
fiscal year (in March of 1996).
That last set of financial statements showed phenomenal losses, which was surprising inasmuch as they reflected a complete discontinuity with all of the information previously made public. The enormity of the losses requires that a precise analysis be made in order that the performance of the group can be evaluated objectively for the period ended in 1995 as well as subsequent years.
shown by the figures below, the first half year financial statements for the
period January 1994 to June 1995 confirm (a
posteriori) that the performance of the group was certainly reduced
compared with the period before the crisis but stabilized despite the weakening
in the beginning of 1995. Management of the group during that critical period
naturally suffered during the first half of 1995 from the neutralization of general
management by the decisions of the investigating judge.
My successor accompanied the publication of the figures for the first half of 1995 (made in September of 1995—that is, less than three months after assuming his functions) with very pessimistic comments on the financial situation of the group and announced his intention to take, at the time the financial statements for the full year would be finalized (that is, in March of 1996), 20 to 24 billion francs of provisions to, according to him, write off the past and restructure the group in accordance with the new strategy that he had outlined. That announcement naturally created a lot of excitement, but, paradoxically, the price of the stock was little affected. The chart below illustrates the variation in the price of the stock from its listing at the time of privatization in 1987 up until that critical 1995-1996 time period. It may be noted that during these eight years, and despite the significant drop in 1994, Alcatel Alsthom’s stock followed the same overall progression as the CAC 40 index.
Dumbfounded, as were other managers who were familiar with the group from inside, I expressed to the auditors my surprise at their silence when faced with this assessment which radically contradicted all that had been said up until that time about the group, and again recently, with their endorsement, at the time the 1994 financial statements were finalized (which, it should be remembered, was done in my absence). They responded that, at that date (in September of 1995), the chairman’s statement regarding anticipated reserves had not been submitted to them, nor the justifications which supported them and that they would not have to be involved until the financial statements were ultimately finalized.
Six months later that would be done and their approval of the financial statements would be obtained, reflecting a complete departure from those of the preceding years, all approved by the same board members and the same auditors.
How can this paradox be explained? There are three possibilities: Were the figures for the preceding periods incorrect? or were exceptional losses experienced in 1995? or was it to accommodate the years to come?
To help the reader come to his own judgement, I feel compelled to provide my analysis of the results.
The table below sets forth the principal figures for the 1995 financial statements and the corresponding figures for the two preceding years fiscal years.
The press release that was published in 1996, at the time of the approval of the 1995 financial statements by the board, divided the exceptional charges (23.9 billion francs) into three categories: 13.4 billion in restructuring costs (10.7 of which were exceptional); 13.5 billion in write-downs for the cost of acquisitions (goodwill) (10.9 of which was exceptional); and non-recurring operational charges (2.3 billion, of which 1.9 was included in the operating margin).
The restructuring costs covered, first, transactions paid for in 1995, following decisions made principally by the previous management, in the amount of 2.7 billion francs (in the same order of magnitude as the expenses paid in the preceding years); and, secondly, with a reserve of 10.7 billion francs for actions to be taken in the following years, in the proportions of 40% in 1996, 40% in 1997 and 20% in 1998. It was later said that this restructuring program was to entail the elimination of 30,000 jobs.
With respect to the amortization of
goodwill (13.5 billion francs), 2.6 billion francs corresponded to the annual
write-down for 1995 (similar to the one taken in the preceding years). The
remaining 10.9 billion francs was an exceptional charge with respect to earlier
acquisitions for which the income producing prospects did not seem to justify,
in the opinion of the new management team, the value on the balance sheet and
about which it was said that the price paid was too high. The principal
acquisitions involved were the British company STC, specializing in undersea
telecommunications systems (write-down of 2.8 billion francs); the Italian
company Telettra, specializing in transmission (for 4.2 billion francs); the
telecommunications division of Rockwell in the United States (1.1 billion
francs); acquisitions of ground cable companies in Germany and Canada (2.05
billion francs); and last, Générale Occidentale (multimedia and services) for
600 million francs.
What’s to be thought of the significance of these exceptional charges?
The exceptional non-recurring charges for the 1995 fiscal year corresponded certainly with the desire to make the subsequent financial periods more comfortable. The amount of short-term provisions (less than a year) which were charged to the fiscal year amounted to more than three billion francs.
As to the restructuring plan, it involved charging the 1995 fiscal year alone not only for the restructurings that year, but also for the three following years, for which the annual amount remained, indeed, scarcely more than the amount in the preceding years.
The exceptional goodwill write-down reflected an erroneous assessment of the prospects for the future in certain business activities. Alcatel’s publications in the following years would, indeed, show the weaknesses of the hasty judgements made in the early months.
Alcatel would rapidly emphasize, for example, the importance and profitability of its undersea cable line of business. One can read in the brochure Alcatel Today (July 1998):
"The undersea cables market is in full expansion. World data traffic will require significant intercontinental capacities. Investments made by Alcatel have enabled it to respond to the most significant demands of the market. Included among major recent contracts are:
'Sea Me We 3, a 22,370 mile connection
linking Europe, Asia and Australia;
"Atlantis 2, a 7,500 mile connection linking South America, Africa and Europe;
"Gemini, an undersea optical fiber network between London and New York; and an 18,600 mile transpacific China-USA connection."
Several months later, in connection with a new $800 million order for 18,000 miles of transpacific cables to interconnect the United States, Hawaii, the Fiji Islands, New Zealand, and Australia, the manager responsible for the undersea cable sector of Alcatel indicated that this new contract was also important because, following several others, it confirmed the soundness of the wager made by Alcatel ten years earlier in investing in Australia for that technology. His comments were referring to the construction of the Botany Bay facility, which was discussed in Chapter IV.
Another confirmation: My successor would indicate, on December 10, 1998, before the European Workers Committee for the Alcatel group, that “Alcatel’s positions in the cable industry were of utmost importance, notably in the undersea cable area;” and several months later, the internal review High Speed Diary, subtitled an article in its April 1999 edition, “Undersea Networks: A Booming Business.” Last, a final confirmation: After the announcement of the new contract for 4.3 billion francs, a major daily newspaper entitled an August 18, 1999 article, “Undersea Cables Bring Alcatel Good Fortune.”
These results were obtained by the commercial and technical industrial action plan which was in place in 1995, no significant acquisitions having been made in this area during the subsequent years. This success of Alcatel in underseatelecommunications was foreseeable in 1995, even if at the time the market was at a low point, because the traditionally strong position of Alcatel in this field had been further reinforced by the acquisition of STC. Alcatel had thus become the leading manufacturer with 40% of the world market in this very high technology business. The write-down taken in 1995, nevertheless, reduced the value of this business on the balance sheet to less than one year of sales, a ridiculous value for the world leader in this type of business. That reserve of 2.8 billion francs was clearly a major error in assessing the future prospects of this traditional business of the group.
The acquisitions of Telettra and Rockwell had enabled Alcatel to acquire remarkable technology in the transmission field and a significant part of the United States market, as explained in Chapter VII. Here also Alcatel Alsthom didn’t hesitate, as early as 1996, to emphasize its excellent position (as world leader) in the new synchronous transmission technology (SDH in Europe and Sonet in the United States), the telecommunications area which was to be the strongest in subsequent years. In a press release accompanying the announcement of its 1997 results, it was stated:
"Benefiting from its success in transmission, making it the world leader in the field, Alcatel intends to develop an extended range of ways to access the subscriber and of transmission by submergible cable and satellite…. It is particularly by its plans in switching and in transmission and access that Alcatel expects to follow up on the remarkable breakthrough that it has made in the U.S.A. over the last two years."
Similarly, several months later, comments regarding the company's performance during the first months of 1998 indicated the following: “The transmission line of business once again produced a very satisfying performance, with sales for ground systems reflecting strong growth in the United States as well as in Europe."
These statements did not mention that these results were due to acquisitions made in the beginning of the decade and which had been massively depreciated in 1995 (by 5.3 billion francs in total). One can also compare the decision to burden the 1995 results with 1.1 billion francs of "estimated over payment" for the acquisition of Rockwell to the cost of 23.2 billion francs that Alcatel would agree to pay three years later (thereby accepting 22.9 billion francs of goodwill) to acquire the American company DSC, of a size hardly greater than the Rockwell division and with the same generation of technology, the acquisition of which had in fact been ruled out five years earlier.
The 600 million franc write-down for Générale Occidentale was not justified either. The sale of the investments held by that holding company would, in fact, generate more than 5 billion francs in capital gains in the two years that followed.
The write-downs for the Alcatel Cable acquisitions appeared equally disputable.
On the consolidated balance sheet of
Alcatel Alsthom, the cable sector was valued at 10 billion francs before the
charge for 1995 losses and 5 billion afterwards; but at the same time the stock
market value of the Alcatel Cable shares held by Alcatel Alsthom was close to
16 billion francs. In fact, in September of 1997 the group confirmed its
confidence in the cable business by distributing the following chart which
shows “une rentabilité en croissance règulière” (a steady growth in
profitability) from 1992 to 1996. Therefore, there was no "gap" in
Furthermore, it is easy to be convinced of the excessive nature of all of these extraordinary charges by simply considering the information communicated by Alcatel Alsthom. My successor decided in effect to withdraw Alcatel Cable from the stock market (that he would however cause to be listed again five years later under the name of Nexans) and to merge it with Alcatel Alsthom. The notice, approved by the COB and which was published for this transaction, deserves to be reviewed. That merger decision followed the finalization of the 1995 financial statements by a few weeks.
The merger was accomplished by an exchange
of shares. It was therefore necessary to determine the market value of Alcatel
Alsthom, the acquiring company, as well as the market value of Alcatel Cable,
the company being acquired. For Alcatel Cable, a listed company, the stock
market value was used. For Alcatel Alsthom it was deemed necessary to estimate
the presumed stock market value. This estimate was made by adjusting the
consolidated balance sheet net worth by replacing the book value of the
principal sectors with their market value. The diagram below reproduces these
estimates and shows, for the whole of the group, a market value exceeding the
balance sheet net worth by 55 billion francs.
The 60 billion franc net worth of the group before finalizing the financial statements was reduced to 35 billion as a result of the exceptional charges attributed to the 1995 fiscal year.
The estimated value of Alcatel Alsthom used for the Alcatel Cable merger was, therefore, 90 billion francs (35 + 55 = 90), as compared with the stock market value at that time in the neighborhood of 60 billion francs. That estimate of 90 billion francs was, moreover, made very carefully because in this transaction Alcatel Alsthom shares were being offered to the minority shareholders of Alcatel Cable. It was necessary, therefore, to seduce them and to guard against any possible challenge to the relative values used to determine the exchange of shares.
One can also appreciate the excessive
nature of the write-down of the cable sector in the 1995 financial statements
by analyzing the effect of the merger of Alcatel Cable on Alcatel Alsthom’s
consolidated balance sheet. Before the merger the group owned 81% of its
subsidiary, for which the balance sheet value at the end of 1995 was, as has
been seen, 5 billion francs (after more than 5 billion had been written off).
To acquire the remaining 19% of the shares in its subsidiary, Alcatel Alsthom
issued 10.1 million shares for which the per-share value on the stock market
was around 400 francs—that is, it agreed to a total price of more than 4
billion francs to acquire 19% of Alcatel Cable after it had just brought the
value of the 81% that it already owned down to 5 billion francs!
But the consequences for the image of the group were serious.
Referring only to the decisions made simultaneously in March-April of 1996, one will note that the message given to the market was, to say the least, confused. First, an historic loss of 25 billion for the fiscal year and the net worth reduced from 60 to 35 billion francs, resulting in a deterioration of the debt-equity ratio (gearing) (which went from 33 to 57%) for the same level of net debt (20 billion francs); but secondly, the valuation of Alcatel Alsthom at 90 billion francs—that is, 30 billion more than its market capitalization at that time and more than double the net worth after the write-down of losses. That valuation would, moreover, be confirmed when assets were sold during only the three subsequent fiscal years. The capital gains realized in these sales would exceed 20 billion francs.
Still, if one had the curiosity to look at the analysis made for the New York Stock Exchange, where Alcatel Alsthom’s stock is also quoted (the 1995 Annual Report on Form 20F), one would find, in Alcatel’s own words, a more reasonable description of its performance for the 1995 fiscal year:
"Alcatel Alsthom posted net losses of FF 25.6 billion in 1995 compared with a net profit of FF 3.6 billion in 1994.... Excluding the effect of exceptional restructuring provisions, exceptional amortization of goodwill and the FF 1.9 billion of non-recurring operating charges, Alcatel Alsthom posted losses of FF 481 million in 1995."
And it could be added that, if it were possible to take into account all of the minor indiscernible transactions which probably brought costs forward or deferred income items, it would appear that the 1995 fiscal year was in fact profitable. The "actual" profit of about 3 billion francs would in fact have been in line with the latest projections that the assistant chief financial officer had given the board during its January 25, 1995 meeting, which was going to be my last.
In order to become finally convinced of the artificial nature of these exceptional losses, one could also consider cash flow. Using the same definition as in prior years, it was -435 million francs in 1995 (compared with 11.726 billion francs in 1994 and 13.649 billion francs in 1993). But subsequently the new management deemed it more suitable to reclassify the “net short-term variations in restructuring provisions" into cash flow which, for 1995, was therefore brought from –435 million francs to 2.847 million francs. This in fact amounted to a recognition of the artificial nature of these charges to the 1995 fiscal year.
These contradictions did not trouble the various supervisory organisms which had to be aware of them. A rapid but careful analysis would easily have revealed them. That’s why I was determined to do it for the reader whom I hope to have convinced to share my opinion that the enormous exceptional charges (and, therefore, abyssal losses) for the fiscal year 1995 were totally unjustified.
In a word, that year, presented as catastrophic, would seem in the end to be quite good when considered in the context of the climate at the time. The economic slowdown caused the profits of most companies to plunge. In addition, Alcatel Alsthom had to overcome the handicap of two management changes and be subjected to pestering by the press regarding the company's "affairs." During 1995 the operations of the group permitted it to show a surplus of several billion francs for the financing of investments which remained essentially at the level of prior years—6.3 billion francs (compared with 6.8 billion in 1994).
That’s far from the notion that many must have had of a gap of 25 billion francs in the financial statements of the group.
I remain dismayed that this presentation of results, making the situation out to be darker than it was, could be approved by all the relevant social organisms and I fear that it created for the group a significant two-tiered risk—degradation of its image and deterioration of its financial credibility.
The damage from degradation of the company's image is obvious: Demotivating employees and creating concerns among customers. For example, how does a company convince its customers that it intends to remain the world leader in optical ground and undersea transmission when it depreciates the corresponding assets and justifies that decision by the mediocre prospects for those businesses in the years to come?
The massive character of the provisions would make it difficult to read and interpret the results in later years. The 10 billion francs of goodwill written off exceptionally in 1995 should have been amortized at the rate of 500 million francs for each of the 20 subsequent years. The completion of the restructuring program, if done according to the schedule anticipated, should have been charged 4.3 billion francs in 1996, 4.3 billion francs in 1997, and 2.1 billion francs in 1998. As a result, in order to be able to compare accurately the performance of the group with those of prior years, it would be necessary to add to the charges shown 4.8 billion francs in 1996 and 1997 and 2.6 billion francs in 1998.
In neglecting to do so, one risks, in
starting out with the financial situation presented as catastrophic in 1995,
being easily seduced by the rapid improvement in profits, which would only
reflect a recovery of provisions. That euphoria could only last a few years,
unless it was accompanied by a sustained profit margin at a level sufficient
for the year to cover all of the charges stemming from operations and the
inevitable restructurings which were always necessary in this industry, while
managing to produce an adequate net profit, as was always the case for Alcatel
Alsthom each year up until 1994.
It seems that the Commission des Opérations de Bourse (COB) was disturbed by the enormity of the provisions and write-offs decided by Alcatel Alsthom. It made that known to the board and to its chairman and asked that detailed justifications be shown and that the ultimate use of provisions be clearly reported. It’s not up to me to determine to what extent that recommendation was satisfied.
On the other hand, it is possible to estimate to what extent Alcatel’s financial statements for subsequent years were affected by the provisions taken in 1995. To do this, let us compare the three year periods 1992-94 and 1996-98. Total operating profits for these three year periods were 38.576 billion francs for the first period and less than half of that (17.445 billion francs) for the second period, whereas the net profits were 17.735 billion francs for the period 1992-94 and 22.739 billion francs for the period 1996-98. But if one takes into account the benefit for the period 1996-98 provided by the 1995 charges—that is, 10.7 billion francs for restructuring costs and the 1.5 billion franc goodwill write-down—net profits for the period 1996-98, without considering the effect of taxes, were no more than 11 billion francs. Moreover, they were produced by capital gains realized by the sale of assets, in the total amount of 20.683 billion francs for the period, a figure well above that for the period 1992-94 (2.647 billion francs).
If, then, the three fiscal years 1996-98 hadn’t benefited from the use of provisions and write-offs made in 1995, and if the amount of capital gains from sales had been consistent with prior years, the net profit for the period would have been a loss of several billion francs instead of a profit of 22.7 billion francs. That picture of the financial situation of the group would have been more coherent with those of prior financial periods.
That’s, indeed, the picture that was given by Alcatel Alsthom’s financial statements under American standards. According to the October 24, 1998 edition of the Investor, for the 1996 year “Alcatel’s 2.725 billion franc net profit in France turned into a loss of close to 1.2 billion francs in crossing the Atlantic.” Thus, contrary to the improvements that are shown by a direct reading of the net profit figures, Alcatel Alsthom’s performance deteriorated appreciably during the three years following 1995 when compared with the preceding period. That conclusion is clearly apparent at the level of operating profits, but it is hidden at the level of net profits by the utilization of provisions and the abundance of capital gains from the sale of assets. But everyone knows that the family jewels can only be sold once!
That’s why it seemed indispensable to me to indicate to what extent the picture given of the Alcatel Alsthom group in 1995 was not well-founded. I fear that that presentation damaged the group by destabilizing it both at that time and subsequently—not to mention the insult made to the work and talent of all those who during eight years built Alcatel Alsthom into a world leader in its principal business lines.
In this case, Talleyrand would have been able to conclude: “Ce qui est excessif peut n’être pas insignifiant.” (Whatever is excessive cannot be insignificant.)
It should be recognized that this practice of “charging” a predecessor’s financial statements was becoming more and more widespread. In February of 1996 Challenges published an article entitled “It’s my predecessor’s fault... Financial Statements: the Champions of the Purge” and gave seven examples of French companies, including Alcatel Alsthom. Serious professionals were concerned about the practice. Thus, in the November 3, 1995 edition of Le Figaro, there was an interview with Mr. Didier Kling, president of the Association des Commissaires aux Comptes (Association of Financial Auditors), who sent out an alarm signal and condemned the latitude given to stock market listed companies in the reporting of their results. He stated, in particular:
"It’s not acceptable to let considerable losses appear on the basis that a company has changed chairman. That concept is all the more unacceptable given that the people responsible for the company’s financial statements are, with few exceptions, the same people."
It was necessary that an expert and moral authority say it, but the practice continued nevertheless.
To reinforce its gloomy 1995 balance sheet, my successors added that in telecommunications in particular the group had not been able to make, in time, the choice of new technologies. They unintentionally made amends in Alcatel’s 1999 Annual Report, where one can read the following in the “Message from the Chairman:”
"Alcatel, owing to its cutting-edge technology, sells all over the world telecommunication networks which permit these exchanges at high levels of output and at great speeds…. The technology of today that is universally recognized as enabling the acceleration of output with a simple telephone line is ADSL. N° 1 worldwide for ADSL, with 50% of the market, our group has a position as leader.… The information highway which transports these enormous quantities of packets (data traffic) has to offer increasingly greater transmission capacities. Optical fiber is the only data carrier able to handle such transfers. Alcatel, which holds a leading position in the area of submarine networks, with more than 40 % of the market, is also recognized as one of the leaders in ground transmission and possesses first-rate technology and skill in the area of optoelectrical components."
Further on in the report, in a section regarding network business activities, it is stated:
"To compensate for the decline in narrow band switching… Alcatel turned progressively toward high growth industries. Organized around Xylan, which is based in the United States, the companies acquired by Alcatel reinforce the group’s IP expertise."
All of these technologies about which Alcatel boasted (and rightfully so) in 2000—ADSL, ground and undersea fiber optic transmission, and optoelectronical components—were solidly in place in 1995 and the first investment in Xylan had been decided upon. Alcatel was already, at the time, a leader in transmission, a field in which we had anticipated meteoric development, which explains our perseverance in acquiring Telettra, the Rockwell division, and STC. These acquisitions, so beneficial for Alcatel in subsequent years, were, nonetheless, considered to be without value in 1995 and would account for 10 billion francs worth of losses shown that year.
The true financial situation of the group in 1995 would be rapidly revealed in subsequent years—by profit making operations, a balance sheet concealing several tens of billions of francs of potential capital gains, and the mastery of key technologies which would be Alcatel’s success at the end of the decade.
By the options chosen in finalizing the financial statements, the management team that took charge of the group in the middle of 1995 brought their stones to the chairman’s flogging in the media, neutralized by the judicial proceedings which will be discussed. But in the end the principal victim that these stormy seas would crush on the Tarpeian Rock was Alcatel Alsthom itself, which would be demolished by annihilating the aspirations that many shared for this almost 100 year old group.
One after the other, the business activities linked to communications and the telecommunications operators would leave the group. Then it would be Cegelec, GEC Alsthom, Framatome and even the cable business, except the fiber optic activities, which, incorporated with the Internet activities, would produce, owing to their excellent profit margins, the bulk of the profits that the group (having become Alcatel) would report to the financial markets. The divestitures would next touch upon complete segments of the telecommunications activities, if one believes the announcements made—line terminals, mobile telephones, equipment designed for companies and individuals, and all of the factories.
When I left Alcatel Alsthom’s board once and for all, under circumstances which will soon be related, I sent to my successor, on December 13, 1995, a brief letter noting the conditions which led me to resign, as well as my complete disagreement with the policies that he was going to implement:
"The prolonged duration of the judicial restraints placed upon me prevent me from expressing my opinions to the board; and my presence on the board prevents me from being able to do so outside the company. The silence to which I am in this way, in fact, constrained, could appear to constitute tacit approval of the actions that you are undertaking. I must tell you honestly that I have serious reservations about the strategies that you are adapting.... Alcatel is the result of a bold wager made nine years ago which enabled a French company, whose experience had until then been limited to France, to become the core of a genuine international group, N° 1 in its field.… I am convinced that Alcatel today has at its disposal, on the technical level, good strategic options and, on the marketing level, the right locations. It must and can adapt to new conditions, anticipated over several years, which prevail in today’s market. You have adapted a strategy that I cannot fully approve. Thus, I think that the respectable thing to do is to make available to you my seat on the board.…"
The same day I sent a copy of my letter to each of the board members, with the following comment:
"I wish to extend to those among you who have expressed to me and maintained their confidence my gratitude for the support which you have given me. We can be proud of the work accomplished, the true value of which is not accurately described by the pessimistic observations currently prevailing. The future will judge."
In my eyes it was judged—and more rapidly than I imagined.
It remains that Alcatel Alsthom’s 1995 financial statements appeared to me to provide completely misleading information. Even after several years, I remain amazed that they were able to be conceived and persist despite the regulatory constraints which govern companies listed on the stock market. It’s surprising that they did not give rise to the slightest reservations from the financial press, so abundant in the media. It was, nonetheless, the original sin which would long compromise my successor’s strategy.
Indeed, having presented a supposedly deteriorating situation, he had to, in order to reassure the stock markets, announce a massive restructuring program which would profoundly destabilize the group—30,000 jobs eliminated, for which the effect is not however found in the number of employees, as explained earlier; elimination of a large number of subsidiaries in order to reduce overhead, which would translate into a major centralization (which itself generates additional administrative costs) and total “verticalzation” of the product lines with the national entities completely losing their operational role. These radical measures, contrary to the culture of the group, would seriously perturb its functioning and would have to be rapidly softened, but the damage was done...
The group having been presented as a conglomerate without unity, the systematic sale of assets producing capital gains was found to be justified. Moreover, this concentration on the telecommunications market pleased the stock markets and it would generate substantial exceptional profits during several years (about 40 billion francs overall). Combined with the utilization of provisions taken in 1995, that windfall made the financial statements more attractive, while hiding the persistent weakness of the operational results, which would never again equal the level attained in 1992-93.
On the technical level, the break-up strategy advocated by my successor proved equally damaging. It was only after one or two years that Alcatel’s strengths in the new technologies (optical, ADSL, etc.) were recognized and valued. To respond to pressure from analysts, an active strategy was developed to acquire new technologies and market share. Companies had to be bought for a price that, once the euphoria had passed, would prove to be exorbitant, especially in the case of young companies, the value of which rested on the presence of a team of talented managers whose loyalty Alcatel had difficulty winning over. In the case of the American company DSC, the acquisition of which had been considered and ruled out in 1990, it was, nonetheless, with full knowledge of the facts that the acquisition was made in 1998, in agreeing upon, as we have seen, a price of 23 billion francs, 95% of which represented goodwill.
When the economic climate became more difficult, Alcatel appeared weakened. Its business activities, which now were limited to telecommunications, would experience the full brunt of reduction in orders from the telecommunications operators. The operating profits were insufficient to fund the inevitable and continual restructurings, which used nearly 30 billion francs of provisions, the sudden announcement of which reinforced the doubts which had been developing among the analysts over several months.
The stock market reaction would prove to be unforgiving (excessive in my opinion in disgrace as well as in praise). After the wild euphoria, the price of Alcatel’s shares returned, six years later, to its 1995 level, but the CAC 40 index had nonetheless doubled over the period. Alcatel's stock price even continued to go down, approaching its first quoted price at the time of its privatization in 1987, before regaining some strength.
That drop in the price of Alcatel’s stock brought about increased bitterness amongst the employees, already traumatised by the continual restructurings and the absence of aspirations which they denounced in the strategy. Having had confidence in the future of Alcatel Alsthom, a large number of employees had participated in the stock offerings which, during my tenure, had been reserved for them. The collapse of their savings funds, built up in most cases with retirement in mind, increased their anxiety about the future.
Yet, it is the remobilization of determination and talent that can give Alcatel the jump-start it needs, a rebirth which I believe is possible because this group, even amputated and despite the setbacks encountered, still possesses some real assets.
 In August of 1998 The Wall Street Journal, in an article written by Douglas Lavin, wrote that the chairman of Alcatel "has shaved the headcount only about 1% to 189,500 at the end of 1997 from 191,800 when he arrived in 1995." For further information, Alcatel Alsthom's total December 31 headcount for the years 1992 to 1997: 203,000 in 1992; 196,500 in 1993; 196,900 in 1994; 191,830 in 1995; 190,600 in 1996; 189,549 in 1997.