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Chapter V - A New CEO

Henceforth I will only be a powerless witness of the decadence.
Charles de Gaulle

These judicial procedures, marked by the slow rate at which they dragged on, by their relentlessness, by the extreme media coverage, and finally by their lack of any basis (which was not recognized until after 13 years of investigations and trials), had as their first consequence my being brutally forced to leave my job as CEO of Alcatel Alsthom. My departure left an opening for a new CEO who, with little familiarity with the industrial world of electro mechanics and electronics, chose to follow a strategy completely opposite from the one pursued previously.

What were, for Alcatel Alsthom, the consequences of this judicial relentlessness of which I was the victim? The scope of the damage suffered by the group would be immeasurable: Tens of thousands of jobs would disappear, millions of shareholders would see their capital melt away, and France would lose a 100-year old industrial group that had raised itself up to the level of a world leader.

The first decision taken by the new management was to paint an apocalyptic picture of the situation of the group and to make substantial write-offs in the 1995 financial statements. These losses would permit the new management, in the following years, to allege an improvement, which was, it will be seen, artificial.

The new management carried out a strategy mainly privileging financial criteria. Its strategy involved selling the electro technical parts of the company, which were less appreciated by the financial analysts, and limiting the activities of the company solely to the telecom business. The new management purchased several companies in the telecom sector, unfortunately paying excessive prices at the time the internet bubble was inflating. When the situation reversed, the company had to mop up its very large losses, partially by offsetting them by large capital gains made through the sale of the “crown jewels”—all the non-telecom activities, which were recorded on the group’s 1995 balance sheet at their historical cost.

At the end of the decade during which the group lost about €20 billion, Alcatel Alsthom had disappeared. The company struggled to keep from sinking. Its sales were divided by two, the number of employees by more than three, and its stock price compared with the CAC 40 fell by half as well. It is the story of this descent into hell, triggered by Jean-Marie d’Huy and presided over by my successor at the head of Alcatel Alsthom, that I will now describe.

It was on March 10, 1995 that my 23 years of work for the group Compagnie Générale d’Electricité (CGE) (later named Alcatel Alsthom) came to an end. The brutality of the decision, its disproportion with the alleged facts, and, as has been seen, its lack of any basis, made me think at first that the absurdity of the restriction imposed on me from working for Alcatel Alsthom would be corrected in a few days. But since justice can be blind and corporative, the restriction would be confirmed on appeal. The Board of Directors replaced me at first with Marc Viénot, CEO of Société Générale, who assured with tact an uncomfortable interim period of several weeks, the time it took for Ambroise Roux to conclude the negotiations that he had begun several months before with the person who would become my successor on June 22, 1995.

Ambroise Roux, the former CEO of CGE, thus took advantage of the opportunity made available by the judicial procedure to appease an old resentment, as I explained in Chapter 10 of my book L’envol saboté d’Alcatel Alsthom. To arrive at his ends, he didn’t hesitate to feed a subterranean media campaign on the theme that “the CEO of Alcatel Alsthom is a man who stands alone and does not prepare for his succession. [I was only 60 years old at the time.] He does not have the firm support of the Board of Directors.” Le Monde took the lead role in this campaign. An article published on December 8, 1994 was entitled “The disappointment of the French group and the future of its CEO Pierre Suard: The head of the American company ITT could create a surprise at the next Alcatel Alsthom Board of Directors meeting.” In the text of the article it was said that “a member of the Board of Directors,” using the customary expression, had confided: “If Araskog wants to have the head of Suard, it would be difficult for us to oppose him.”

But it so happens that on that December 8, I was in New York meeting with Rand Araskog, the CEO of ITT, as I had done regularly since 1987, when CGE purchased the telecom subsidiaries of his group. We maintained cordial relations and saw each other regularly. He had presided over the Supervisory Board of Alcatel during the first years after the acquisition—that is, for as long as ITT was an Alcatel shareholder. Later, after ITT’s shares in Alcatel were exchanged for those of its parent company, ITT became a shareholder of Alcatel Alsthom and Rand Araskog was appointed to its Board.

That December 8, we were having lunch together, in a very friendly ambiance, as usual, when we saw the head of public relations for ITT approaching the table. He was carrying a message for his boss. Rand read it, and then showed it to me. It was a copy, with translation, of an article from Le Monde. Quickly abandoning his legendary placidity, he categorically denied the words that the article had attributed to him and, furious, demanded that his collaborator immediately publish a categorical denial, which he wrote out on the corner of the table. ITT released its communiqué: “Mr. Araskog is disgusted. The article is completely false. Mr. Araskog is a very solid supporter of Pierre Suard. He understands that times are difficult in Europe, in particular for telecommunication equipment orders, but he firmly believes that Pierre Suard has the total and unanimous support of the Board of Directors.” With this brief interruption closed, we continued our lunch, as relaxed and friendly as usual. But this episode confirmed the maneuvers of Ambroise Roux. I certainly was wrong not to have paid more attention to it.

Four months later Ambroise Roux did not hesitate to inflict the death blow. While the court was examining my appeal of the order of the investigating judge forbidding me from working, Ambroise Roux let it be known to the Chancellerie that maintaining the judicial control that had been imposed on me would suit the Board. I learned of this terrifying news from the mouth of my lawyer, Mr. Danet, former President of the Bar, who had just been informed of it by the principal prosecutor of Paris himself. I immediately suggested that my lawyer call Marc Viénot, which he did. Mr. Viénot said he was unaware of this, which, he added, certainly was not the opinion of the majority of the Board of Directors. I then asked my lawyer to call Ambroise Roux, which he did in my presence. The response of Ambroise Roux illustrates his personality very well: “What you say to me, Mr. President of the Bar, is very unfortunate for President Suard. Who could have leaked this? It must be Rand Araskog.” Always the same alibi but this time the spectacle, so full of hypocrisy, was not credible. Rand Araskog did not speak French. He was always very prudent and on important subjects always consulted with his lawyers. How can one imagine him approaching, or having someone else approach, a foreign government to express his personal concerns and even more the concerns of his colleagues on the Board?

I cannot appraise what influence this action could have had on the decision of the Cour d’Appel, which maintained the interdiction against me from working for Alcatel Alsthom, while softening the other conditions of my judicial control.

I describe these maneuvers by Ambroise Roux with sadness because I always had a certain esteem for him, as he was one of the rare senior executives who had impressed me over the course of my professional life. But I must in truth describe all the meanderings that ended in the designation of my successor. Ambroise Roux prided himself in being the conscience of French industry and, thanks to his networks, to make and destroy heads of companies. For example, he attributed to himself the appointments, in addition to Serge Tchuruk, of Jean Marie Messier at Compagnie Générale des Eaux, and of Pierre Blayau at Moulinex. His sudden death in 1999 did not permit him to know all the negative consequences of his maneuvers!

When my successor assumed his functions on June 22, 1995, he arrived at the head of an industrial group that was traumatized by the events of the last months, but which was perfectly healthy in spite of the economic slowdown that affected its traditional customers—especially the telecommunications operators. Alcatel Alsthom was, in its principal businesses representing over 95% of its sales, the world leader, as with telecommunications and cable, or among the top two or three, as with energy and transportation (Alsthom and Cegelec). When one realizes what this group became 10 years later, one can hardly imagine what it was like in 1995, what this group had been able to accomplish, the financial results that it had obtained, and the internationally renowned reputation that it had.

To evaluate the extent of the decline and try to understand the reasons for it, it is necessary to reflect a moment on the situation that was lost. I have already described the flight of Alcatel Alsthom9 that was broken in 1995. This nearly 100-year old group was created under the name of Compagnie Générale d’Electricité in 1898. Until the beginning of the 1980s, its activities were essentially restricted to France and were carried out in a number of areas, including public works, household appliances, computers, and distribution. My predecessor, Georges Pébereau, first as President, then as CEO, undertook to focus the company’s activities on three main areas, acquired the company’s competitors Alsthom and Thomson Telecom, and prepared for the internationalization of the company in negotiating the purchase of the telecom subsidiaries of ITT. All this was done during the period when CGE was a nationalized company, but it was done without any major concession that would restrict CGE in the future. It became my responsibility, when I was appointed CEO in July 1986, to finalize the agreements with ITT (December 1986), to implement them, and to carry out the privatization of the group in May 1987.

During the nine years that were to follow I was able, with the help of a team that was solid, competent, devoted to the company, and enthusiastic, to take up the challenge that was imposed on CGE, an eminently French company, and merging its telecom and cable subsidiaries with the former subsidiaries of ITT located in Europe, North and South America, Asia and Australia. It was necessary to formulate a global strategy with uniform rules of control and management, but at the same time to maintain the autonomy of each subsidiary so it could apply the common policies on the markets for which it was responsible. But it was necessary also, by organic growth or acquisitions, to promote the whole group in order to give it the force to play a winning role on the world market. That required having an active policy for research and to develop new products and extend the company’s commercial networks.

This policy of intense efforts bore fruit. I enjoy revisiting one of the graphs that I used on May 6, 1993, to present the group to the Paris Investor Conference, hosted by JP Morgan. It compares the sales of Alcatel Alsthom (AA) with those of its competitors in two areas—Energy and transportation (the vertical axis), and telecommunications (the horizontal axis).

This graph perfectly illustrates the position that Alcatel Alsthom had attained in 1993 on the international scene—first in its business areas. In the energy transport sector, only ABB was ahead of it, but Alcatel Alsthom surpassed the American companies General Electric and Westinghouse, the German company Siemens, and the Japanese companies Mitsubishi and Hitachi. In the telecom area Alcatel Alsthom was the world leader, ahead of ATT (which was to become Lucent), Siemens, Northern Telecom (which was to become Nortel), NEC, Ericsson, Motorola and Nokia.

In 1993 the sales of the group were ₣156 billion, double what they were in 1986. Seventy-five billion of those sales came from telecom versus ₣28 billion in 1986; ₣30 billion were in the cable sector (11 in 1986); ₣41 billion in the energy and transport sector; ₣2.3 billion in central switches and ₣4.2 billion in services. Fifty-seven percent of those sales came from overseas companies, versus only 13% in 1986. Thus, in 1993 the foreign subsidiaries had sales 10 times greater than what they had in 1986. During this period the group, which started out as an almost purely French company, was very much internationalized.

In 1993 the group had an operating profit of ₣14.3 billion, that is, 9.1% of sales (with 11.1% for telecom, 7.4% for cable, 8.2% for energy and 15.7% for services). The net profit of the group was ₣7.062 billion (versus 1.159 in 1986). This was after investing ₣15.2 billion in research, ₣2.488 billion of restructuring costs, and ₣2.053 billion of goodwill amortization. It was the best results of all companies in France, and the capitalization of Alcatel Alsthom on the stock market put it in the top rank of the companies in the CAC 40.

The year 1994 was more difficult because Europe suffered a significant slowdown of economic activity, which caused the company’s customers to reduce or defer their investments. The operating profit went from ₣14.3 to ₣9.5 billion and the net profit from ₣7.062 to ₣3.620 billion. These figures were approved by the Board of Directors in my absence. Ambroise Roux was able to get the Board to reduce by ₣300 million the net profit that the management presented, taking it to ₣3.920 billion. The only justification that he gave was to establish a general provision, without any specific allocation for it. In spite of this reduction, the net profit of Alcatel Alsthom remained in 1994 among the best of the companies of the CAC 40.

The group benefited from an excellent image in the business world, which appreciated its strategy, the positions it acquired and the results it obtained. On December 9, 1992 Alcatel Alsthom received the Prix Cristal for the transparency of its financial information, awarded by the Compagnie des Commissaires aux Comptes and the newspaper Les Echos. In January 1993, the Tribune Desfossés gave the group the prize for the best strategy. The Tribune prize, according to its sponsors, recognized the entrepreneur having, by its strategy, left the greatest imprint during the year. “It is to the CEO of Alcatel Alsthom that this prize is given for 1992, the year of a very serious consolidation, making his group number one in the world—especially for telecommunications, turbines and the TGV.”

It was this enterprise that my successor was going to take over on June 22, 1995. Everyone knew the attitude that he adopted after only a few weeks of observation. From September, and after having pushed aside the Finance Director of the group, he announced his intention to establish in the 1995 financial statements enormous provisions of ₣20 to 25 billion. These provisions were made, he said, to correct the past and prepare the group for a new strategy, not otherwise defined. According to him, it was necessary to correct the errors “of acquisitions for which too much was paid, an insufficient productivity, an organization poorly adapted and poor planning.”

In the spring of 1996 Alcatel Alsthom therefore announced phenomenal losses of ₣25.5 billion for the year 1995, during which the sales had reached ₣160 billion. The losses resulted mainly from the constitution of enormous provisions. The press release published at the time grouped under three headings the exceptional provisions of ₣23.9 billion: Cost of restructuring, ₣13.4 billion (of which 10.7 were exceptional); goodwill amortization, ₣13.5 billion (of which 10.9 were exceptional); and nonrecurring operating charges, ₣2.3 billion, of which 1.9 were included in the operating margin.

The restructuring costs included the restructuring operations paid for in 1995 for an amount similar to what had been charged in prior years. For the rest, those costs—that is, a provision of ₣10.7 billion—were for restructuring operations to be carried out in the following three years, without their being further described.

The goodwill amortization (₣13.5 billion) included ₣2.6 billion for 1995, an amount similar to what was taken in prior years, and an exceptional provision of ₣10.9 billion for acquisitions made in prior years. Essentially, these included ₣2.8 billion for the British company STC (manufacturer of submarine telecom cables); ₣4.2 billion for the Italian company Telettra (specialized in transmission); ₣1.1 billion for the telecom division of Rockwell in the United States; ₣2.05 billion for two terrestrial cable companies in Germany and Canada; and finally ₣600 million in the services sector (Générale Occidentale).

These figures appear to me to be unbelievable, even if they received the approval of the Commissaires aux comptes and of the company’s Board. A quick analysis convinces me that they do not truly represent the situation of Alcatel Alsthom in 1995, even though they do not conflict with any of the accounting rules, which in fact leave a lot of room for applying judgmental discretion. I published the results of my analysis in Chapter 9 of L’envol saboté d’Alcatel. In fact, if the 1995 financial statements had been made like those of prior years, Alcatel Alsthom would have had a profit of several billions of Francs in 1995 instead of the artificial loss of ₣25 billion.

How and why this great difference?

For the restructuring costs, the 1995 financial statements affected four years—the current year, which is normal, and the three following years. For the three following years this clever accounting would have the effect of increasing the net profit for each of those years on average by ₣3 billion.

The exceptional goodwill amortization was based on a negative judgment that the new management had on the future of some acquisitions made before 1995. But subsequent years in fact were going to demonstrate that this was categorically false—something that would be confirmed by publications of Alcatel itself or by the statements of its management.

For submarine cable, for example, the write-down that was taken on STC reduced its value on the balance sheet to less than one year’s sales, a very low value for a high technology business in which Alcatel was the world leader with 40% of the market. Moreover, in subsequent years Alcatel was going to profit (thanks to the industrial and commercial capabilities that the submarine cable business possessed in 1995) from the strong growth of that market—a market in which the cable business made most of Alcatel’s profits during those years.

In its terrestrial transmission business, Alcatel’s position was very much reinforced by the acquisitions of Telettra and the division of Rockwell, to which the new management had applied an exceptional write-off of ₣5.5 billion. Alcatel was, in particular, the world leader for the new synchronous transmission technology, with strong positions in Europe and the United States. This is in fact what the company said, self-flatteringly, in the press release that accompanied the publication of its 1997 results: “In profiting from these successes in transmission, which make it the world leader in this domain, Alcatel plans to develop….. It is particularly by its plans in switching, transmission and access that Alcatel expects to continue the remarkable penetration that has occurred in the United States over the last two years.” This double success was the direct result of the technology held by Telettra and the commercial implantation of Rockwell, but the press release failed to say that.

The ₣600 million write-down in the services and media area (Générale Occidentale) is also completely arbitrary. The resale of those businesses would in fact generate ₣5 billion of capital gain in the next two years.

The write-off was no less justified for cable. But the new management of Alcatel proceeded in a particularly original way with regard to that sector. In 1995 the cable activities were grouped in the subsidiary Alcatel Cable, which was a company listed on the stock exchange with a stock market value of ₣20 billion. Alcatel held 81% of that subsidiary, so its holding was valued at ₣16 billion on the stock market. This investment was recorded on Alcatel’s books at ₣10 billion, but the new management reduced it to ₣5 billion as of December 31, 1995, after writing off ₣5 billion of “losses” for cable for that year. At the beginning of 1996 Alcatel decided to delist the cable subsidiary from the stock market. The publication of the documents necessary for this delisting followed by several weeks the publication of the 1995 results. It is particularly instructive to compare the information given in these two documents, which had been published practically simultaneously.

Alcatel Alsthom proposed to the minority shareholders of Alcatel Cable to exchange their shares for shares of the parent company. It was therefore necessary to value both companies. As was customary, this responsibility was assigned to investment banks. For Alcatel Cable they took the stock market value. For Alcatel Alsthom it was necessary to estimate the presumed stock market value. This estimate was made by adjusting the net assets on the balance sheet by replacing the book values of the principal sectors with their market values. The document submitted to the COB concluded that the market value of Alcatel Alsthom exceeded the net assets on the balance sheet by ₣55 billion. Now the market value (₣60 billion) had been reduced to ₣35 billion as of December 31, 1995 by the imputation of ₣25 billion of “losses.” The document presented to the COB concluded therefore that Alcatel Alsthom was valued at 35 + 55 = ₣90 billion. One can assume that this estimate was made with prudence because it was necessary to convince the minority shareholders to make the exchange and to guard against disputes over the terms of the exchange.

To acquire the 19% of Alcatel Cable held by the minority shareholders, Alcatel Alsthom issued 10.1 million shares, of which the value per share was approximately 400₣. The group therefore paid a little more than ₣4 billion for the 19% interest in its subsidiary, while it had just reduced the value on its balance sheet of the 81% of Alcatel Cable which it already owned from ₣10 to 5 billion. So the company involuntarily gave proof that the write off, in this sector as well, was without justification and it created goodwill of ₣2.5 billion, a figure contained in the 1996 Annual Report.

All in all, these enormous provisions or write-offs that were charged to the 1995 financial statements were not, for the most part, justified or else they were not related to the current year but with subsequent years. The presentation of the financial statements that Alcatel Alsthom had to prepare for the New York Stock Exchange, where its stock was also listed, appears to be more in conformity with reality. One can read in the Annual Report on Form 20F the following: “Alcatel Alsthom posted net losses of ₣25.6 billion in 1995, compared with a net profit of ₣3.6 billion in 1994… If one excludes the provisions and exceptional charges…. Alcatel Alsthom posted a loss of ₣481 million in 1995.” I would add that if the financial statements for that year had been prepared in a manner consistent with past practice, the period would not have shown a loss. It would have shown a profit of ₣1 or 2 billion. This conforms to the forecast that I had presented to the Board of Directors at its January 25, 1995 meeting, which was going to be, without me suspecting it, my last.

One can indeed speculate that this decision to load the 1995 financial statements with heavy provisions, combined with difficult to detect accounting adjustments, contributed to an increase of liabilities—for example, the way in which the nonrecurring ₣1.9 billion was written off.

Therefore, in spite of the difficulties of the economy and the turbulence which the new management lived through, Alcatel Alsthom did not have the catastrophic 1995 that my successor alleged. The reality was a profit much lower than that of 1994, but still acceptable, especially if it is compared with the profits of the following years. The balance sheet contained, in spite of the enormous write-offs, significant latent capital gains. During only the three following years, the sale of certain businesses would produce a profit of ₣22 billion. In 2000, to face up to the great difficulties that we will see later, Alcatel, taking advantage of some changing accounting principles, would go so far as to increase by ₣3.7 billion (565M€) the value recorded on the balance sheet for operations carried out in 1989 and 1992. By increasing, as of December 31, 1999, the value of those old assets, Alcatel was trying to boost its net assets, which it needed in order to amortize the enormous goodwill created by its new acquisitions. But Alcatel involuntarily gave, a posteriori, proof of the seriousness of the prior management and of the solidity of the balance sheet that it had left.

The first mechanical consequence of the abusive provisions taken for 1995 was to improve the results for the following years by several billions of Francs per year. This can be seen from the financial statements made in accordance with American accounting principles. According to an October 24, 1998 article in the newspaper Investir, “for the year 1996, the net profit of Alcatel of ₣2.725 billion in France is transformed into a loss of ₣1.2 billion in crossing the Atlantic.”

The analysis of the 1995 financial statements that I published in my book brought me, as soon as it was published, an enraged offensive on the part of the company, directed to its employees and the media. The company denied, quite simply, the right of its former CEO to express himself. But paradoxically the company’s statements confirmed in my eyes the correctness of my analysis but it was difficult to get the press to take my responses into consideration.

Thus, insofar as the cable business was concerned, Alcatel Alsthom gave as proof that the 1995 write-offs were justified because of the fact that it had to take new provisions of the same amount six years later when it decided, in 2001, to relist its subsidiary Alcatel Cable on the stock market. But it failed to point out, besides its responsibility for the management of the sector during the previous five years, the expensive repurchase, in 1996, of the shares held by the minority shareholders when the subsidiary was delisted from the stock exchange, as well as the fact that it put back on the market a company which lacked the two most profitable sectors (which Alcatel retained)—fiber and fiber optic cables, as well as high frequency components. This silence shows there was a total lack of the so-called “proof” mentioned in the company’s statement.

The company denied that the financial results for the subsequent years could have been improved by the excessive provisions taken in 1995. It was however evident, at the level of net profit, from the provisions made (since the restructuring that they covered could only be defined in subsequent years) and from the goodwill written off all at once instead of being spread out over several years. As for the operating profit calculated before the provisions, it could not, as pointed out by the company, be affected by the size of the provisions, which therefore did not influence the subsequent operating profits. This was indeed the rule under French GAAP. However, it seems that the company did follow it in 1995: ₣1.9 billion of “nonrecurring” charges reduced the operating margin for that year, as indicated at page 59 of the Annual Report. Therefore, this provision could be reversed if needed in the following years to increase the operating profit.

Even with the benefit of several years of hindsight I can only see one reason for this huge write-off for the year 1995—to make it easier in subsequent years. My successor could therefore, in October 1995, one month after having announced the cost of his restructuring plans, foresee with confidence that there would be a return to profit in 1996, “substantial profits” in 1997, and that the company “would be very profitable” in 1998. This way of proceeding makes one recall the very critical comment of Didier Kling, President of the Association des Commissaires aux Comptes: “It is not acceptable to allow sizable losses to appear on the grounds that a Group has changed its CEO. This is all the more unacceptable since those responsible for the management of the consolidated financial statements are with few exceptions the same physical persons.”

But it is Alcatel Alsthom and its employees who were the first victims—loss of image for the company, loss of confidence among its customers, lack of transparency in the financial results announced in subsequent years, the need for a drastic and improvised restructuring plan, and the obligation to adopt a strategy to cope with the alleged “disaster.” In the autumn of 1995, Jean-Pierre Halbron, the new Finance Director of the group and henchman for torpedoing the balance sheet, spoke of the new strategy which, according to him, was different from the restructuring carried out in the past, which he considered superficial: “Today we attack the problems at their roots.”

So now we are going to analyze the strategy that the new management applied to “attack the problems at their roots” and the results produced by that strategy during the first decade when the new management was in charge.

9 L’envoi saboté d’Alcatel Alsthom, published by Editions France-Empire



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