Chapter VI - The New Strategy: The Divestitures
“My objective is to reestablish good profitability starting in 1998—that is, in a very short time for a company of the size and complexity of Alcatel Alsthom…. The defensive actions in the recovery plan involve increasing productivity and refocusing the company on its basic business areas. But recovery will also come from offensive actions—especially in the telecom sector…where the group possesses decisive technological advantages in the high growth areas of that sector, such as transmission, data networks and mobile communications.” That is what one can read under the signature of the new CEO in the 1995 Annual Report. In his introduction to the next year’s Annual Report, he presented the group this way:
Alcatel Alsthom is a world leader centered in the telecom businesses for the supply of equipment, systems and services. The company is also a major player in energy and transport. Due to its market knowledge and high level of research and development, which permits it to make offers on the cutting edge of technology, the Group resolutely confirms its ambition to be a world leader in its business areas.
These several lines describe the new strategy for the group, with a recognition of its advantages and position as a world leader. But because of the balance sheet in the 1995 financial statements, it was necessary, in order to give the new strategy credibility, to put in place a plan to increase productivity, which involved modifying the organization and reducing the number of its employees. It was also decided to refocus the group on its basic business areas which, as we will see, meant gradually reducing the size of the company, gradually shrinking it. In reality the most consistent line of conduct was to appeal to the financial markets and their analysts, which meant reporting good financial results and focusing the company on a single business area, the one with the greatest growth potential.
So the company quickly announced a “simplified organization” with four sectors: Telecom; cable and components; engineering and systems; and GEC Alsthom. In the same presentation there had formerly been six: Alcatel; Alcatel Cable; Cegelec; batteries; GEC Alsthom; and the media businesses. The difference between the two organizations is minimal, both in appearance and in reality. The media business had been sold. The submarine cable business was withdrawn from Alcatel Cable and put into Alcatel, thus calling it “telecom.” This submarine cable business was very profitable. It encompassed two specialty areas (cable and transmission equipment). It was a separate, standalone business in Alcatel Cable and stayed that way in telecom, where it greatly increased the profits of that sector. The battery business was reattached to the cable sector, but since there was no synergy between those two activities, it remained independent. When the cable business was listed on the stock exchange, the battery business was not included. It remained independent but was sold several years later. The only reorganization that represented an improvement was to put in Cegelec the activities related to the installation of telephone cables. Previously those activities were part of Alcatel. But this change was short lived. Several years later Cegelec was sold to GEC Alsthom without the cable installation business.
The statement in the 1996 Annual Report that “[t]his organization reinforces the coherence of the business activities and synergies of each sector,” left those who knew the group from inside with a certain amount of skepticism.
The measures aimed at reducing costs took the form of increased centralization, making it impossible to determine whether the stated objectives were attained. In any event, the 1995 financial statements left enough margin for the results to show considerable improvement in the following years!
On the other hand, focusing the group on telecom was indisputably one of the constant components of the new strategy.
The services and media sectors were the first to be sold. In October 1995 Alcatel Alsthom contributed to Havas its activities in publishing and written press and received in exchange 21.2% of the stock of Havas. In 1997 that investment was reduced to 7%, producing a capital gain of ₣2 billion. In 1996 Alcatel Alsthom sold its 25% interest in Cofira (the holding company that controlled France’s second-ranking mobile telephone operator—SFR) and realized a capital gain of ₣3.74 billion. So in two years the sector that had been written down by ₣600 million in 1995 produced more than ₣5 billion of exceptional profits.
Certain divestitures provoked an upheaval with the employees. In 1996 Alcatel Alsthom decided to sell ETSSRA, a small subsidiary specialized in security and located principally at Chambery. I had encouraged that company to expand, including into the Paris region, seeing in the business (which was in full expansion) a way to diversify in the private and intelligent building telephone sector. I also wanted to take advantage of the dynamism and strong personality of the company’s managing director, Michel Ferrero, who had the right to buy 5% of the stock of his company.
Alcatel Alsthom selected Ecco Sécurité to acquire this company, after having rejected an offer from the managing director, Michel Ferrero—an offer that was made with the moral support of the company’s salaried employees. But Michel Ferrero would present a problem for the sale if he didn’t also sell the stock that he owned personally. He refused to accept a very tempting offer for the purchase of his shares. Still, in order to make him sell, Alcatel didn’t hesitate to threaten him—in fact, so much so that he had to call for help from the nurse (who was always present at the headquarters facility). Finally the senior management of Alcatel summarily dismissed Mr. Ferrero for serious misconduct. On learning this, and shocked by the brutality of the methods which were so counter to those that were customary in the group, the salaried employees decided to oppose the actions of Alcatel Alsthom and to occupy the company’s headquarters offices.
The managing director of Ecco Sécurité, leading a commando group of forty persons, decided to retake possession of the offices by force during the night. But the police intervened, stopped him, and, after being tried in an emergency court session, was condemned to immediate imprisonment. After several days the tension eased and, faced with the determination of the employees, Ecco Sécurité wisely decided to sell to Michel Ferrero the company that it had just acquired. With a little listening and understanding of the local situation, this blunder could have been prevented. But the new management of Alcatel perhaps wanted, by the brutality of its methods, to make an example and impress other, potential recalcitrant executives.
The abandonment in 1997 of the energy and transport sector, which included GEC Alsthom, Cegelec and Framatome, marked a great break with the 100-year old past of Compagnie Générale d’Electricité and Alcatel Alsthom. The energy and transport businesses represented a third of the sales of the group and a counterbalance for the telecom activity. Though the two business areas were equally technical, they presented different business cycles. With the energy and transport sector, growth was less rapid, there were fewer actors, and its customers were traditionally more loyal.
GEC Alsthom resulted from the merger in 1989 of Alsthom, a subsidiary of Compagnie Générale d’Electricité (CGE), and the electromechanical division of the English company GEC (General Electric Company). CGE, which would become Alcatel Alsthom the following year, and GEC each owned 50% of the shares of the new company, which was called “GEC Alsthom.” GEC Alsthom was overseen by a Supervisory Board comprised of an equal number of members designated by each of the shareholders and presided over by Lord Weinstock, CEO of GEC. The day-to-day operations of GEC Alsthom were carried out by a Directorate of 5 members, three French and two English. Jean-Pierre Desgeorges, formerly CEO of Alsthom, presided over the Directorate until 1991, when he was replaced by Pierre Bilger.
It is Pierre Bilger who had to deal with the change of attitude of the shareholders vis-à-vis their common subsidiary. He gave a detailed accounting in his book10 about his presidency of GEC Alsthom and in particular the passage from “GEC Alsthom” to “Alstom.”
A little after my eviction from Alcatel Alsthom, Lord Weinstock had to leave GEC under conditions less chaotic than those surrounding my departure from Alcatel Alsthom but no less harmful for the GEC group that he had built up over a life marked by an exceptional professional success. Lord Weinstock and I had established very amicable relations, which, according to Pierre Bilger himself, facilitated the development of GEC Alsthom. I think if Lord Weinstock and I had had a few more years available to us, our two groups would have come together in some of the other business areas of GEC, such as telecommunications, satellites, and defense. It is, in any event, a perspective that Lord Weinstock and I had discussed several times as GEC Alsthom prospered and the confidence between us grew stronger.
Our successors thought differently. The new GEC management wanted to disengage itself from GEC Alsthom. Alcatel Alsthom seized the occasion not to take control of the subsidiary, but to disengage itself as well from the electromechanical sector. And Alcatel Alsthom did it in a way that revealed how its mere financial logic was driving its strategy.
The CEO of Alcatel Alsthom easily reached an understanding with his English counterpart on the method to be used to divest of their participations in GEC Alsthom—namely, to list the company on the stock exchange. The name of the company was changed to “Alstom” (dropping “GEC” and without the h, for reasons that I don’t know). Since “Alsthom” (or “Alstom”) was now the name of a public company, that designation was removed from the name of Alcatel Alsthom. Alcatel Alsthom’s name was changed simply to “Alcatel.” The method used to list the new company on the stock exchange benefited the interests of the shareholders at the risk of compromising the new company’s future.
The first step was the sale of Cegelec to GEC Alsthom, thus satisfying an old demand by the Alsthom managers. Like my predecessors, I had always thought that Cegelec, which specialized in industrial processes and controls and installation, needed to remain as an independent, standalone company. Cegelec and GEG Alsthom often had complementary activities but they required different management styles. In one case, the most important activities took place in the factory where those responsible had available on the spot all the support needed during the manufacturing phase, which itself involved processes that were repetitive and well tested. In the other case, at the assembly site, often at a remote location, it was necessary to assemble, finalize the work and try out the equipment, often having to turn to local methods and means, all the while respecting the technical objectives. But Alstom, on leaving the Alcatel Alsthom group, needed the assembly capability. The new Alstom was mistaken not to let these installation activities remain as a standalone business. Several years later Alstom divested most of those activities.
The first manifestation of the voracity of Alcatel Alsthom (using the expression of Pierre Bilger, whose courtesy and moderation were legendary) was that before transferring Cegelec to Alstom for a price of €1.6 billion, Cegelec paid Alcatel Alsthom an exceptional dividend of €250 million.
Alcatel Alsthom and GEC then agreed, for the second manifestation of their voracity, to have GEC Alsthom pay each of them an exceptional dividend of €700 million. Thus, they didn’t hesitate to present to the stock market a company with net assets so blatantly insufficient that it was practically fatal to the company when, several years later, it would encounter a major financial crisis.
Finally, in order to minimize the tax it would have to pay on the capital gain resulting from the transaction, Alcatel Alsthom listed on the stock exchange a company that was legally different from GEC Alsthom. Alcatel Alsthom transferred assets to the new entity. However, in doing so it automatically triggered the termination of a license agreement that GEC Alsthom had with General Electric (GE). The license related to the manufacturing of very powerful high end turbines. The loss of this license and technical support for very powerful turbines probably played a role in the decision, several years later, to purchase the turbine division of ABB, a transaction that was perilous to Alstom and cost Pierre Bilger his job.
The majority of the stock of Alstom was put on the stock market at a price of 31.25€ (205₣) per share. Alcatel Alsthom and GEC each retained a 24% interest. Alstom’s stock was quoted for the first time on June 22, 1998. It rapidly lost 10% because the offering price was probably too high—it valued the company at €6.7 billion, that is four times net assets or 22 times the net profit.
Financially it was a good transaction for Alcatel, which realized from it a capital gain of €2.098 billion, in addition to the exceptional dividend. But Alcatel abandoned a company without any protection and which was financially weakened—a company that represented a traditional business activity of the group and one that had a great future. Alcatel finished its divestiture in 2001 by selling in two steps the 24% of Alstom that Alcatel had retained at the time of the stock listing. On these subsequent sales Alcatel realized a capital gain of €1.122 billion. Thus, Alcatel again provided the proof of the extent of the latent capital gains that were contained in the 1995 balance sheet of Alcatel Alsthom.
Alcatel would also dispose of Framatome. The bringing together of Framatome and Alcatel Alsthom was the perfect example of an operation failed “in the French fashion,” a cocktail of interventions by the State, political proclamations, personal rivalries, and intrigues by foreign competitors. It was in 1985 that Georges Pébereau, CEO of a CGE that at the time was a nationalized company, acquired 40% of Framatome. Previously Framatome had been owned by the Atomic Energy Commission for two years, following the bankruptcy of Creusot Loire. At the same time the private group Dumez acquired 12%. After these transactions Framatome remained under the control of the State. However, the privatization of CGE in 1987 took Framatome out of the State sector.
Framatome’s long time CEO, Jean-Claude Lény (always wary of his shareholders, whoever they may be) adjusted to this situation on the condition that CGE remained a direct shareholder and did not transfer its Framatome shares to Alsthom, CGE’s subsidiary. Mr. Lény made it clear that he was absolutely opposed to any combination with Alsthom, something he had managed to prevent on several occasions. Nevertheless the complementarities of the two companies were evident. In a nuclear plant Framatome supplied the nuclear boiler and Alsthom the vapor turbines and related equipment. Often the companies bid on the same projects, but it was up to the customer to select its suppliers. If Framatome and Alsthom had been combined under a single management, the natural synergy would have been realized, particularly by making it possible to submit turnkey offers on export projects.
That was the intention of Georges Pébereau when he had CGE acquire the Framatome shares. Naturally it was mine as well. CGE (later to become Alcatel Alsthom) purchased the 12% of Framatome held by Dumez, thus bringing Alcatel Alsthom’s holding to 52%. This acquisition of a controlling interest set in motion a lively and hostile campaign, fed by the Framatome management. Following an order from Pierre Bérégovoy, Minister of Finance (an order that he said came from François Mitterrand, the French President) to reduce CGE’s stake in Framatome to less than 50%, and a threat to renationalize CGE (a proposed law to that effect had been introduced), I resigned myself to sell 6% of the Framatome shares to Crédit Lyonnais and to sell 2% to Framatome’s employees. It was not insignificant that Crédit Lyonnais was the purchaser, rather than the Atomic Energy Commission (CEA). The bank classified the shares as a financial investment, thus keeping them out of the State sector. At the end of all this, the public shareholders of Framatome (35% for CEA and 10% for EDF) were in the minority vis-à-vis CGE (44%), the employees (5%) and Crédit Lyonnais (6%). As a result, Framatome was not considered to be a company in the State sector and so did not have to apply the regulations applicable to it.11 This compromise seemed to me to be quite satisfactory. CGE (which became Alcatel Alsthom) had increased its participation from 40% to 44%, had specifically received the right to control the company’s strategy, and could await better days.
The context became favorable once again when, in 1993, the new government announced a large program of privatizations. Negotiations were carried out in depth with Philippe Rouvillois, CEO of CEAI. Mr. Rouvillois had been charged by the government to take on this responsibility. We reached an agreement that was submitted for his approval. Since the 1990 crisis, the ambiance within the Framatome management had evolved significantly, and Framatome’s emblematic CEO even declared in a press conference that he saw advantages in his company joining a large industrial group like Alcatel Alsthom. It seemed that all the obstacles had been removed. But the government let the decision linger. In the final months of 1994 the government finally reluctantly refused to approve the agreement that had been reached. The government was preoccupied with the upcoming elections. So this is how, for the second time, the possibility of forming a complete electromechanical group with Framatome lapsed.
My successor took the matter up again in 1996. Philippe Rouvillois again approached the authorities with his conclusions and the government agreed in principle for Alcatel Alsthom to take control of Framatome. But Jean Claude Lény, still Framatome’s CEO, again opposed any combination with Alstom. Nevertheless that is the solution that my successor tried to bring about. There was a favorable development—in 1997 Jean Claude Lény was replaced at the head of Framatome by Dominique Vignon, who accepted the combination. On the other hand, there was an unfavorable development—a change of management at GEC. Lord Weinstock retired and his successor, who wanted to disengage from GEC Alsthom, absolutely opposed any investment by the common subsidiary in Framatome. Alcatel could not change this and the combination of Framatome and GEC Alsthom had to be abandoned.
But Alcatel must not have wished to bring about the combination because another approach was possible and it seems that it was not envisioned. Alcatel Alsthom still existed. It owned 44% of Framatome and could have purchased the other Framatome shares to take control of the company. Subsequently Alcatel Alsthom could have contributed the Framatome shares to Alsthom when GEC was no longer a shareholder.
But this was not the approach that was chosen. To the contrary, in 1999 Alcatel negotiated its withdrawal from Framatome, exchanging 80% of its Framatome shares (reducing its holding from 44.1% to 8.6%) for an increase in its participation in Thomson CSF (today, Thales). The State, which was the owner of those two companies, approved the transaction. In disengaging from Framatome, Alcatel realized that year a new capital gain of €386 million. The remaining shares of Framatome that Alcatel Alsthom owned were subsequently sold as well.
Thus ended for CGE (Alcatel Alsthom, then Alcatel) the saga of the failed marriage with Framatome. An amazing result of this failure: Today Framatome, still within the orbit of the State, has as a minority shareholder Siemens, Alsthom’s historical competitor for the construction of power stations, and Germany has abandoned all of its nuclear programs! I don’t know what approach Siemens used and with what arguments it could have convinced the French government to let it become a shareholder of Framatome.
The cable business was the next victim of the process of focusing Alcatel Alsthom on telecommunications. But it was not all of cable, as Alcatel chose to retain the sectors with the best operating margins—high frequency components, fiber optics and fiber optic terrestrial cables. The submarine cable business had already been moved into the telecom sector. In June 2001 the new entity, as amputated, was named Nexans and was listed on the stock exchange at 27€ per share. Alcatel sold 20.1 million shares and temporarily retained 20% of Nexans, which Alcatel would dispose of in subsequent years.
Alcatel did not realize any capital gain on this sale, in part because the difference between the acquisition price and the value on the books established in 1996 (when Alcatel Cable was delisted from the stock market) had increased, at the end of 2000, to €299 million. After two difficult years, Nexans again became profitable and its stock price surpassed its price at the time of the introductory listing. And a few years later the stock price was over three times the original offering price. Nexans has remained the world leader in its domain and, sheltered from the limelight, has quietly pursued its development. If Alcatel had not separated out optical fiber (a product line very close in technology and marketing to traditional cables), Nexans clearly would have known better than Alcatel how to develop that business, a business which Alcatel finally (in 2004) sold to the Dutch company Draka.
The sale of the traditional sectors of the group (except telecom) was completed in 2004 with the sale of Saft, the manufacturer of batteries utilized in defense equipment and electronic products such as mobile telephones. We have seen that in 1996 that business was artificially attached to the cable sector, but correctly it was not incorporated in Nexans. Saft was sold on January 14, 2004 to the investment fund Doughty Hanson. That year the fund realized a substantial profit by placing the Saft shares on the stock market. For Alcatel the sale of its subsidiary for €390 million produced a capital gain of €255 million.
During these years Alcatel also sold, in addition to its industrial assets, most of the financial investments that Alcatel Alsthom held, such as in Compagnie Générale des Eaux, Société Générale, Lafarge and CCF. The shares of those companies were recorded on Alcatel Alsthom’s balance sheet at the end of 1995 at €500 million, at a time when their value on the stock market was €650 million. The rise in the stock market in subsequent years permitted Alcatel once again to realize, in selling those shares, several hundreds of millions of Euros of capital gain.
Alcatel also chose systematically to sell its real estate, in particular several office complexes in the area of Paris and in Paris itself. This real estate was recorded on the company’s books at its historical cost, and so its sale generated substantial capital gains. Even the building in Paris that was the historical headquarters of the company was sold and leased back!
actions taken by the new management responded to the wishes of the
financial analysts, but were also taken out of necessity, because at
the same time Alcatel was proceeding to make numerous acquisitions in
the telecom area which, for the most part, would prove to be very
disappointing. Acquired at very high prices, it became necessary to
write them down massively when the “bubble” burst and the markets
returned to a more traditional growth rate. It is this second part of
the new strategy—the concentration of the company’s activities on
telecommunications—that we are going to examine now.
10Quatre million d’euros: le prix de ma liberté, by Pierre Bilger, Bourin Editor.
11 This was the period during which the French Government pursued what was known as the “neither-nor” policy – that is, neither privatization nor nationalization. The reader will see later how this policy was applied to a proposed merger of the satellite activities of Alcatel and Aérospatiale. (Translator’s Note)