Chapter VII - The New Strategy: Only Telecom
Quos ultra citraque nequit consistere rectum.
There is a just dimension: there are finally precise limits
beyond which good cannot be sustained
The choice of focusing the company’s business solely on the telecom sector was made in response to calls from the financial analysts and was done in order to satisfy the recommendations of the financial community. At the end of 1997 the CEO clearly set out his objective in front of 400 managers of the group who were attending a convention in Stuttgart. He said, with graphs to support his presentation, that it was necessary to focus the company’s activities on the sector to which the stock market gave the greatest value and to which it applied the greatest multiple of earnings—that is, telecom. It was also the sector that was growing the fastest, so it was an appealing sector in many respects. In a climate of euphoria, the implementation of that strategy would turn out to be very costly because of perilous investments that the company was going to make. In the implementation of this strategy to focus Alcatel’s activities solely on telecom, one can see two phases: Until 2000, Alcatel made numerous and very costly acquisitions; after 2000, when the market turned, the investments had to be written down, resulting in heavy losses and again causing the company to have to sell off other assets and to lose its position as a leading global supplier in the sector. Henceforth Alcatel would have to focus on only a part of the telecom sector, and a part that would be progressively shrinking.
The first transaction consisted of renewing and expanding steps being taken to bring together the satellite activities of Alcatel and Aérospatiale. An agreement between Alcatel and Aérospatiale for merging the two businesses, with Alcatel having management control of the merged entity, had been signed in 1990. However, Aérospatiale, a nationalized company, did not receive approval from the State to implement the transaction. The spin-off of Aérospatiale’s satellite activities would have been qualified as a partial privatization. It was the period of the “neither-nor”—that is, neither privatization nor nationalization. We have previously seen how this doctrine was applied to prevent CGE from retaining a majority of Framatome. But, it was said, the exception for Aérospatiale went “in the right direction” for the ayatollahs of socialism.
My successor expanded the 1990 agreement by adding to it the similar activities of Thomson CSF (Thales today). The July 1998 agreement was presented as the first step in the construction of a great pole of professional electronics and defense. In September it was announced that Alcatel and Thomson CSF had joined together to establish a common research laboratory. Five common projects were announced: Very high frequency microelectronics (the components As-Ga); optoelectronics; military networks utilizing Internet technologies; a network for digital radio and television; and payment by electronic means. However, afterwards it did not appear that these grand ambitions were realized.
But the creation of the satellite company, Alcatel Space, which brought together different capabilities, was a positive development. Alcatel received 51% of the stock and Thomson CSF 49%. At the same time Alcatel acquired 15.8% of the stock of Thomson CSF. It was the first step in a flirtation between the two groups, something strongly desired by Alcatel but cautiously rejected by Thales and something that was going to feed the gossip of the business community for several years. The next year, in July 1999, Alcatel increased its ownership to 25.5%, in negotiating with the State the contribution of 9.45% of Thomson CSF at the same time that the State bought 80% of the shares of Framatome that Alcatel held. In July 2001 Alcatel’s interest in Thomson CSF was reduced to 20.03% when Alcatel took over 100% of Alcatel Space. But in November 2001, then in September 2002, Alcatel sold shares of Thales in order to improve Alcatel’s finances and therefore reduced its holding, first to 15.3%, and then to 9.7%.
At each stage Alcatel repeatedly stated that it was the largest private shareholder of Thales and a putative merger candidate, living with the hope of one day convincing its partner. Alcatel therefore continued to consolidate the Thales shares in its financial statements on a pro rata basis of its equity participation instead of accounting for them as a financial investment. One can understand that in this atmosphere, where relations were somewhat rough, technical cooperation between the two companies could hardly thrive. But one must remain confident. “Cooperation between the companies no longer necessitates a cross shareholding,” peremptorily declared the Finance Director of Alcatel when, in July 2002, Alcatel sold its remaining stock interest in Thomson multimedia. However, several months before it was stated in Alcatel’s 2001 Annual Report that “the group intended to retain the shares” that it had held since 1998. But the difficulty of the moment weakened the certitudes of the day before!
It was in the United States that Alcatel made its largest acquisitions: DSC Communications Corporation (September 1998); Packet Engines (December 1998); Assured Access (March 1999); Xylan (April 1999); Internet Devices (June 1999); Genesys (January 2000); and Newbridge (February 2000). It seemed that there were two objectives in this acquisition spree: Enlarge the commercial base (DSC) and acquire new technologies in broadband routers (Packet Engines), private networks (Xylan), virtual IP private networks (Internet Devices), IP access for IP network solutions (Assured Access), software for the integration of telephones and computers (Genesys), and ATM networks (Newbridge Networks, a Canadian company).
“Thus completed, Alcatel will henceforth command a position of first rank in the three key areas of communications for tomorrow—internet networks, optics, and electronic commerce,” Alcatel’s CEO said in his message accompanying the 1999 Annual Report. He added: “The refocus of Alcatel, on the way to being achieved, makes the group one of the world leaders of telecom.”
So the strategy was succeeding, at least in appearance. In reality it would rapidly be shown to be catastrophic. These acquisitions, for which too much was paid, did not fulfill the promises. Alcatel had a lot of difficulty integrating the knowhow of the startups and did not succeed in attracting and retaining the “inventors” who had developed it.
DSC, the first important acquisition, had already been considered for acquisition by Alcatel in 1990 but we had decided at the time not to acquire the company because the price was too high. In 1998 the new management saw it differently and accepted the high price. In order to pay for the acquisition of DSC, Alcatel issued 19.5 million shares12 (that is, 10% of its capital), thus creating goodwill of €3.5 billion (€3.541 billion, to be exact), which was more or less 95% of the cost of the transaction. This goodwill was, as was permitted at the time by the French GAAP, immediately offset by a capital decrease. The only addition to Alcatel’s balance sheet assets as a result of this transaction of nearly €4 billion was €226 million for “technology acquired.” The enormous cost of the transaction thus went unnoticed for a long time by the shareholders, who had little understanding of the loss in value caused by a capital increase where more than 90% is immediately written off. This method was utilized several times to pay for acquisitions, at least as long as the amount of net assets allowed it.
All of these acquisitions, which were made when the internet bubble was inflating, involved a price that largely exceeded a price based on an objective evaluation of the balance sheets of the acquired companies. That is why the goodwill from the purchase of Packet Engines (1998 sales: $20 million) was €233 million; for Assured Access (1998 sales: $0.6 million) it was €305 million; for Xylan (1998 sales: $350 million) it was €1.262 billion; and for Internet Devices (1998 sales: $1.4 million), it was €147 million. In each case the goodwill represented the greater part of the total price: 63% for Xylan and 80-90% for the other companies. The reader will note that the price agreed to for the purchase of these companies represented 10 to 100 times their sales!
I described in my first book Alcatel’s blunder in taking control of Xylan. On March 7, 1995, at the last Executive Committee meeting that I presided over, we had decided to purchase for $10 million, 10.5% of the capital of Xylan, which at the time was a very young company (it was founded in 1993) but which already had developed the first IP switching products. Four years later, when the company was purchased and when it had matured and was valued 40 times more than what we paid in the 1995 transaction, the CEO of Alcatel stated, to underline Alcatel’s interest in the acquisition, that “Alcatel had tried for two years to buy Xylan.” It was not stated that in 1997 Alcatel had sold, no doubt to realize a capital gain, half of the shares acquired in 1995, thus showing how little interest Alcatel had in the company. This is not the only example of such a back-and-forth by Alcatel in its approach to IP technology. We had, in 1993, created in the United States with Sprint a company which we called Alcatel Data Networks. Alcatel and Sprint had each contributed to the new company its data transmission activities. The aim was to prepare for the transformation of our switching products to the IP technologies. Alcatel Data Networks was closed by the new management in 1996.
The prices paid in 2000 for Newbridge (sales $1.3 billion) and Genesys were even more excessive. The price of €10.1 billion was paid by the issuance of 208 million shares—that is, a dilution of 20% of Alcatel’s capital at the price of 50€ per share. It should have resulted automatically that there was an increase of the net assets of €10.1 billion, with the addition to assets of €9 billion of goodwill (€7.367 billion for Newbridge and €1.688 billion for Genesys). But following the method already used for DSC, the goodwill was offset by a capital decrease. However, since the capital increase was not sufficient, it was complemented by revaluing some acquisitions made 10 years earlier, as I have indicated previously. So in the French financial statements the creation of 208 million shares only resulted in an increase in consolidated net assets of €1 billion—that is, only 5€ per share for the newly-issued shares, versus 12.4€ for the existing shares. Again, no shareholder contested this method or pointed out that in the financial statements made according to U.S. GAAP, net assets were €26.1 billion, versus only €14.4 billion under the French GAAP.
But the wind was going to turn brutally. Strengthened by these acquisitions, but probably conscious of the weakness of the financial engineering, at the end of 2000, the CEO of Alcatel undertook to negotiate with the American company Lucent (heir to the giant and world leader ATT), a merger of the two companies, a transaction that certainly was audacious and not lacking in panache. Lucent, similar to Alcatel in its technical ability, was very complimentary from the commercial point of view, since Lucent was mainly present in the North American market, whereas Alcatel was in the rest of the world. But the two groups would encounter the same difficulties—how to conserve in the IP world the dominate positions that they had acquired in the traditional telephone area when faced with newcomers like Cisco, Oracle and other companies specializing in the new switching technologies?
The negotiations between Lucent and Alcatel were actively carried out, with each side using as advisors investment banks specialized in these types of transactions. However, the negotiations suddenly fell apart on May 29, 2001. The reason, according to Alcatel’s press release, was a disagreement over how to share power in the merged company. The repartition of influence and the senior management positions is always a critical point in this type of transaction. Wisdom therefore dictates that agreement should be reached on those questions before undertaking in-depth negotiations. Alcatel called an exceptional meeting of its Board to inform the directors of what had happened. After two long hours of explanation on the reasons for the failure and while the directors were thinking that the meeting was coming to an end, the CEO surprised them by saying that he would announce to the financial markets the next day that Alcatel was going to have to undertake (contrary to what had been said previously) some major restructuring and that the 2002 financial statements would show several billions of Euros of losses. The directors were astounded by this sudden announcement, as much by its form as by its content. The head of the Finance Committee of the Board learned this news, like the other directors, on that day. Of course his committee had the responsibility for overseeing the group’s financial statements. One wonders whether this precipitous announcement of the restructuring plan and write-off of assets wasn’t aimed at anticipating an uncontrolled leak to the press revealing Alcatel’s weaknesses. Those weaknesses probably had been discovered during the financial audit conducted by Lucent’s advisors during the “due diligence” carried out in connection with the negotiations that had just failed.
This announcement came as a major shock to the financial markets. The company’s stock price fell, not least because business was slowing down and the telephone operators were reducing their investments. The forecast that Alcatel successively gave to the financial markets concerning 2001 increased the markets’ anxiety. In April 2001 sales for the year were forecast to increase by 5 to 15% over the 2000 sales. In July it was announced that the 2001 sales would be close to those of 2000, and in October that they would be slightly less. The same thing happened with respect to the forecast for operating profits. In April it was said they would increase faster than sales; in July, it was said they would be positive for the year; and in October, that they would be slightly negative. As for the amount of provisions that would be taken that year, it was estimated at €138 million in April, at €3 billion in July, and at €4.7 billion in October.
Alcatel’s stock price, which had soared in 1999 and 2000 when the internet bubble was inflating (going from 20€ to 97€ in September 2000), had since dropped to 40€ at the time of the Lucent negotiations. After the May 29 announcement, the stock price fell in a few months to 10€. The next year it even flirted during several weeks with the value of 4€. The write-offs suddenly announced in 2001 resulted mainly from the necessity of having to write down the goodwill that had been created as a result of the high prices paid in acquisitions two years earlier of companies that now were performing in a disappointing fashion. The total amount of the write-off could have been increased by about ten billion Euros if most of the goodwill had not been offset at the time of the acquisition.
This time the media didn’t miss making this analysis. Valérie Segond wrote in La Tribune on June 14, 2001, under the title “The Billions that Go up in Smoke,” in reference to Alcatel:
Its CEO Serge Tchuruk wanted to hide behind the effect of the announcement about the failure of the merger with the American company Lucent in order to make the shareholders swallow the pill: Of the €3 billion of provisions, 1.1 [in fact €1.272 billion]—that is, more than ₣7 billion—will come from the accelerated write-downs of companies acquired for cash between the end of 1998 and the height of the technology bubble—that is, Packet Engines, Assured Access Technologies, Internet Devices and especially Xylan, which was supposed to be very profitable but which always produced losses.
In the course of the next year Alcatel again had to launch an additional restructuring plan. Over just the two years 2001 and 2002 the group was to show nearly €10 billion of losses.
The suddenness and repetitiveness of the bad news was particularly vexing to observers of the company and made them very suspicious of Alcatel. Gaëlle Macké, under the title “How the Pussyfooting of the CEO thwarted all the Forecasts,” wrote in Le Monde on June 29, 2002, after having indicated that all the telecom companies had seen their share prices fall:
Nevertheless, where the stock of Alcatel is different is in its volatility, which is as broad as it is sweeping. The violent yo-yos reflect the judgment of the investors on the performance of the company, but also on the fickleness of the rigor and transparency of the communications of the group, particularly of its CEO…. In 2001, when growth was slowing and the potential of the third generation of telephones (UMTS) was being questioned, Mr. Tchuruk was again caught red handed in excessive optimism. From February, Nortel, Ericsson, Motorola and Cisco multiplied their profit warnings, but Alcatel maintained its forecast of an increase in annual telecom sales of 20 to 25% with an operating profit increasing even faster. Then all of a sudden, on May 29, 2001, the CEO was once again constrained suddenly to lower his ambitions, forecasting lower operating profits. Except that this time, the investors didn’t wait to cause the stock price to crash. And the story has just repeated itself in 2001. Mr.Tchuruk persisted in forecasting an operating profit before announcing, last June 26, that this profit would turn into a loss, something the analysts had predicted for a long time.
In the same paper, on June 29, 2002, Laurence Girard, under the title “Serge Tchuruk’s Strategy for Alcatel is Broken,” asked:
What will remain of Alcatel after the telecommunications crisis ends? Restructurings, divestitures, outsourcing, the group presided over by Serge Tchuruk doesn’t cease to redraw the perimeter of its areas of business operations. After having announced the elimination of nearly 34,500 jobs in 18 months, the new plan to eliminate another 10,000 jobs, announced Wednesday, June 26, takes on the appearance of a stampede… After the failure of the transatlantic merger plan with the American giant Lucent, the size of the earthquake appears in broad daylight. Six years after his arrival at the head of the group he is constrained to have to announce for the year 2001 an historical loss of €5 billion and new restructuring plans. Henceforth Alcatel is no longer in the fray for a place as a world leader, but struggles to survive. In order to reduce its fixed costs the group is accelerating its plans to dispose of factories and whole pieces of its activities. The ‘crown jewels,’ such as its investments in Thomson Multimedia or Thales are disposed of by the company in part to improve its finances. But the room to maneuver has been reduced. After having rashly declared, in June 2001, that he hoped to make of Alcatel ‘a company without factories’ in selling practically all of the manufacturing assets before the end of 2002, Mr. Tchuruk had to revise his strategy. Only the best factories have been sold and the purchasers are no longer scrambling to buy more.
The European team is moreover at the heart of the cyclone. Lines of products could be purely and simply eliminated. The very heart of the group is touched, limiting its future chances of recovering.
In this somber context the criticisms are becoming more pressing. An inability to interpret the company’s strategy is underlined. Comparisons with groups which, like the German company Siemens, continue to be profitable, thanks to the continuation of their conglomerate status, are devastating.
It is in effect the unexpected consequence of the strategy to limit the company’s activities to telecom. The unreasonable expansion during the euphoria of the technology bubble put in peril, when the situation reversed, the survival of the group, which had been deprived of the counterweight of the other sectors of activity that it had previously developed. To salvage the situation Alcatel had to eliminate many jobs, close factories and sell businesses. Observers were all the more troubled when the CEO announced, the prior year, his goal of making Alcatel an industrial group without factories, a model completely opposite from my conception of industry.
The method generally followed raised many criticisms. Alcatel sold a factory or a business, with its employees, and through a subcontract the acquirer was guaranteed that it would be adequately compensated for a period of one or two years. At the end of that period, the acquirer, then solely in charge of the employees and even if it had good faith at the time of the acquisition (which was not always the case), often found that it had to proceed with the elimination of jobs, a task that Alcatel had in a way subcontracted to it. Alcatel thought in this way that it could escape the difficulties and disgrace linked to these actions.
Several business sectors were abandoned. For example, the important after-sale services network that Alcatel had developed over the course of several years, in France and in some other countries, in order to assure the maintenance of telephone installations sold to private customers, were sold to several buyers. Thus, Alcatel abandoned a network that was very effective in attracting and retaining the installed base of equipment that had been sold and which made it possible for the company to make more sales of adaptations, extensions and new products, all of which are inherent in the life of these kinds of technical installations.
The sector of telephone sets and other fixed line terminals was sold to Thomson Multimedia in two steps. First (in January 2000), the two groups contributed their activities in this area to a joint venture company called Atlinks, owned equally by the two groups but with Thomson having the management responsibility. Second, Alcatel withdrew from Atlinks. Two years later, Alcatel sold to Atlinks Alcatel’s subscriber DSL modem business, without realizing it was disposing of knowhow that was indispensable if Alcatel wanted to be a complete supplier of ADSL or xDSL transmission products, one of the real strengths of Alcatel since the early 1990s. Atlinks, which was managed by the person who was formerly responsible for that activity at Alcatel, successfully developed this sector and thus was able to profit from the expansion of ADSL connections that the telecom operators promoted to their customers.
Alcatel continued to develop products capable of carrying the transmission of voice, data and television (“triple play”) on the same line of the operators’ networks. The sophistication and continuous enrichment of the system of diffusion and the exploitation of those continuous multi-services make it clear that it was necessary to be able to make offers both to networks and subscribers. Alcatel approached Thomson to try to use the DSL capability that Alcatel had sold to it. That attempt failed. So Alcatel had to turn to an American company (2wire). Alcatel purchased 25% of 2wire’s stock for about €120 million. “This acquisition will permit Alcatel to enlarge and extend Alcatel’s integrated ‘triple play’ solution,” the company said in a press release. The company could have added that “this will permit us to correct the error we made in making a hasty sale.” Not the least funny thing in this imbroglio was the fact that the executive who supervised this activity at Alcatel and who was favorable to the sale to Thomson, did not hesitate, several years later, to be hired by Thomson to run the sector which included Atlinks. A good example of conviction and professional continuity!
The abandonment of the manufacturing of optoelectronic components also marked a significant strategic withdrawal for Alcatel. The way this was done also perfectly illustrates the importance given, in the company’s management, to short term financial criteria, at the expense of an industrial vision.
What was involved? Since the 1970s Alcatel was interested in transmission by fiber optics. For this, two components are necessary—the fibers and lasers. I have explained13 how, under my prompting, Les Câbles de Lyon had perfected the industrial fabrication of fibers and the preeminent part of the market acquired in terrestrial optical transmission, and even more so in undersea transmission (30-40% of the world market) during the years 1980 and 1990.
To succeed in this task, Alcatel had to master laser components. This involved very high technology components, very specific to telecom, for which, at least it seemed to me, Alcatel could not be dependent on external suppliers, especially when they were competitors. It is for that reason that, after perfecting the process at the Marcoussis Laboratory, we decided to construct a new factory at Nozay, in the Paris region, entirely devoted to the fabrication of lasers and destined to serve all the world markets. These components, called optoelectronics, made it possible to convert an electric signal into an optical signal that could be carried by light that was emitted and modulated. This modulated light is injected into the optical fiber. Other components make the opposite conversion at the other end of the fiber. A lot of other components were also perfected—for example, to ensure the simultaneous transmission of several light rays (with slightly different wave lengths and therefore different colors) over the same fiber, a technique that considerably increased the transport capacity of the cables.
The preeminent position that Alcatel attained in these technologies permitted the company fully to take advantage of the boom in undersea transmission that occurred in the years 1997-2000. Most of the profits of the group during that period came from those activities.
The factory at Nozay, which became operational in 1994, fully realized our objectives and Alcatel became one of the few manufacturers in the world of optoelectronic components. The group didn’t feign from communicating its success. In a letter to shareholders the group’s CEO wrote in 2000: “Our optical component activity is booming… Alcatel is one of the greats in this sector and desires fully to exploit its knowhow and the quality of its achievements in the area.”
It was then that the finance department of the group devised a way to take advantage of the notoriety of this business. But what they thought would be a real feat turned into a disaster. They envisioned issuing a new type of tracking stock, which they called Alcatel O, reflecting only the activities of the optronics division. These shares would have a first claim on the profits of the division. The CEO of the group took it upon himself to motivate the company’s shareholders to support this original transaction. In a special letter that he addressed to them, written in August 2000, he said: “You are invited to approve a first in Europe: Getting more value out of a key and promising business for Alcatel—optoelectronic components. This will be accomplished by issuing a new class of Alcatel shares of category O, or shares that reflect Alcatel Optronics… I invite you to support your Group in this innovative and strategic initiative.”
However, the optronics division as a standalone operation suffered from a double handicap if it were going to be exposed to the hazards of the financial markets. Its business represented hardly 1% of the group. But more important, it depended directly on Alcatel for 80% of its profits. So it was a small business, involved with high technology products, but whose prospects and transfer prices depended on the goodwill of Alcatel. It was therefore difficult to separate its activity and profitability from Alcatel.
But the markets ignored these weaknesses and appeared to be seduced by this mirage. “Your stock, reflecting Optronics, makes it possible to highlight the intrinsic value of our optical component business,” triumphantly announced Jean-Pierre Halbron, the President of Alcatel, when the Alcatel O shares were listed on the stock exchange on October 20, 2000. The shares were issued at 85€, with a premium of 7€ over the ordinary shares of Alcatel, which were now called Alcatel A. As a result of the issuance Alcatel raised €1.4 billion of capital.
Alcatel Optronics began with much fanfare. In May 2001, in a letter to the shareholders, Alcatel published the victory balance sheet: For the first quarter, €156 million of sales, an increase of 105% over the first quarter of 2000; the operating profit was €30 million, or an operating margin of 19.5%; net profits were €18.4 million, compared with €10.3 million in 2000.
Sadly all of the glorious perspectives on this market—borne in the euphoria of the “bubble” but also ignoring the fundamentally cyclical character of the market for transmission products, especially undersea—collapsed. The market was reduced by fifteen in three years.
The situation with the optronics division was made worse by the failure of the acquisitions made in 2001, such as Kymata. For the two years 2001 and 2002, the losses were €563 million for sales of €554 million. The Alcatel O stock price collapsed. Having been introduced at 85€ in October 2000, it fell as far as 4€ the following year. To end this disaster, Alcatel decided to withdraw Alcatel Optronics from the market and in February 2003 proposed to exchange one O share for one Alcatel share.
This operation proved to be very painful for the investors who, seduced by the discourse of the President of Alcatel, had purchased these special shares in October 2000. They lost 92% of their investment in hardly more than two years. But the transaction was financially beneficial for Alcatel, which sold the shares at 85€ and repurchased them at 7€.
These financial acrobatics unfortunately discredited the optronics activities, which remained strategic for the optical transmission business. Alcatel then sought to dispose of the business. This was done on July 31, 2003. Alcatel contributed the optical component activities to Avanex, a Californian startup, and received in exchange 28% of the capital of the combined business, and paid $110 million to the new business as a contribution for future restructuring.
In the company’s Annual Report it is stated that on December 20, 2004, Alcatel reduced its participation in Avanex to below 20%. “As a result of the partial disengagement and the fact that Alcatel does not have a seat on the Board of Ananex, it is considered that the group no longer has a significant influence on the company. Therefore, the residual value of the Ananex shares will henceforth be accounted for as a financial investment rather than being an equity participation consolidated on a pro rata basis.
And yet this sad adventure didn’t stop there. In 2005 Avanex ran into great difficulties and Alcatel had to come to the aid of its French subsidiary, which continued to be a key supplier of Alcatel. It was learned at this time that Alcatel had remained the owner of the factory at Nozay, but its employees had become employed by Avanex. The number of employees went from 1,200 in 2002 to only a little over 100 in 2005 because in the meantime the fabrication of the components had been transferred to Thailand.
Another example of the knowhow of an industrial group “without factories” sloughing its labor problems off onto the purchasers of the business and losing its technology!
It was also in July 2004 that Alcatel finalized its disengagement from the fiber optic business sold to the Dutch group Draka. The company that received the business, Draka Comteq BV, was owned 50.1% by Draka and 49.9% by Alcatel. To remove any ambiguity over the importance of the residual commitment of Alcatel to this domain, the 2004 Annual Report stated: “In this year’s financial statements Alcatel’s fiber optic business is treated as a business which was sold as of January 1, 2004.” In 2007 Alcatel would transfer to the Dutch group all of its shares in Draka Comteq BV.
Thus ended the long standing position that had been built by the group in transmission optics, fibers and lasers. The realization of the strategy of the industrial group without factories continued to progress!
Alcatel nonetheless continued to picture itself as a leader in optics and ADSL, as the CEO of the group wrote in his message at the beginning of the 2004 Annual Report: “It is thus that we have attained a world leadership position in large band access and in optical networks, two essential technologies.” Further on in the same report it is stated: “Alcatel has strengthened its position as a world leader in optical transmission networks with 16% of the market.” Or still: “World leader in ADSL access, as in FTTU (fiber optics to the end user). Alcatel continued to enrich and improve its offering in order to respond to the new needs.”
Alcatel also chose to abandon the domain of mobile telephones. I said in my first book why I had decided, in the years 1993-1994, to launch the development and fabrication, on a large scale, of mobile telephones. The person responsible for this activity knew, in spite of tough competition from Nokia and Motorola, how to create and market a range of competitive products. He obtained significant results: Twenty million phones were produced and sold in 2000; sales reached €2 billion that year and the company had a small profit. The new management flattered itself with this development in the 1998 Annual Report: “The group is today the fourth supplier in the world of GSM mobile telephones, with over 10% of the market and more than 7 million phones sold in 1998. It is presently number one in several European countries, such as France, Spain and Portugal. This result is due to several factors. Alcatel has made sizable investments in R&D for these phones and greatly increased its production in the sites of Illkirch and Laval in France. Moreover, the group has developed a product line of phones of recognized quality and reliability.”
Written in 1999, this text already did not reflect the reality of the strategy of the group with respect to mobile telephones. Competition was severe from the Asian manufacturers and it was necessary to hang on for dear life in order, like Nokia and Motorola, to bend and not break. Rapidly Alcatel proceeded down the road of abandoning the business. The first sign was given by Alcatel’s hesitation to develop phones for the next generation (to the norms UMTS) solely by itself. Alcatel sought an alliance with a Japanese group, but, after several fruitless approaches, Alcatel remaining alone decided not to incur the expenses necessary for the development required to preserve the business.
At the time of the crisis of confidence that accompanied the bursting of the Internet bubble, the business had heavy losses, like all of its competitors. Drastically restructured and shrunk, it returned to profit in 2002, but the fate of the company was sealed. The second step in the disengagement was the sale in 2002 of the factory at Laval, which was the manufacturer of most of Alcatel’s mobile terminals, and mobile terminals were the only product that the factory produced. Flextronics, a company headquartered in Singapore which took over the factory, received a guarantee that Alcatel would continue to procure the mobile terminals from that factory. In April 2004 Alcatel allied itself with a Chinese company (TCL) and transferred to it the control of the common subsidiary, Tamp, to which the two groups had transferred their mobile telephone activities. In conjunction with the announcement of the creation of this joint venture, the CEO of Alcatel placed the bar very high: “During the next years, the new entity will become one of the five best industrial companies in mobile telephones.” It was not to happen. TCL rapidly stopped procuring from the Laval factory and Flextronics decided to close the factory in 2005. Tamp would transfer the French R&D to China. In March 2005 Alcatel withdrew from Tamp—that is, one year after the creation of the joint venture company with TCL—and transferred to it all the mobile telephone knowhow and even the right to use the brand name.
This time it was a capitulation without condition!
This brutal treatment permitted Alcatel to survive the crisis of the technology bubble, but at the cost of transformations that were so profound that only the future could say if the company that subsisted in 2006, with a business domain very restricted, would be able to recover. The focus of its activities on telecom had accentuated the effects of the market turnaround. In the years 1994-1996, Alcatel employed about 80,000 persons in the telecom sector, out of a total of 200,000 for the company as a whole, and it had sales of €10.5 billion in telecom (€25 billion for the whole company). A sudden burst in the telecom market and the company’s acquisitions had, in 2000, raised Alcatel’s telecom sales to €26.2 billion and the number of its employees to 113,000. But in 2004 these fell to €12.3 billion of sales and 56,000 employees, figures that approximated those of the telecom sector in 1995. In ten years the group overall had seen its business activity divided by more than two.
At the time of the 2007 Presidential election campaign, Le Figaro published “the grand audit of France.” In the economic pages, five tables sadly illustrated the decline of Alcatel Alsthom over the period 1995-2007. At the beginning of the period the group figured among the 11 French companies in the top 100 worldwide, among the 10 first employers in France, and the 10 biggest French companies in stock market capitalization. By the end of the period Alcatel had disappeared from the list of winners in all of these areas.
One can easily imagine all the difficulties that these changes created for the company’s employees, all the trauma that the personnel had to suffer. But did the results obtained and the scorecard for these 10 years under the new management at least justify this much crisis and
This is what we must now investigate.
12 These were the old shares, before Alcatel’s shares were divided by 5. They were selling at about 200€ at the time the acquisition of DSC was announced.
13 L’envol saboté d’Alcatel Alsthom, Chapter 8.