Chapter V - Towards Alcatel Alsthom
Il faut être plus grands, malgré nous.
(We must be greater, despite ourselves.)
With Alcatel underway and CGE privatized, the group would now be able to develop a strategy consistent with the high level of market expectations and its own capabilities.
The field of action would be the world market. In each of its business lines the group would need to be a major player worldwide. It would need to do business for the long term as required in the high technology field and never sacrifice the future for short-term demands. That would require a great amount of cohesion amongst its people and, therefore, a human resources policy rewarding professional experience, motivation, drive and performance. It would also take long-term financial stability in a world that was going to favor restructuring over hostile takeovers. The group could, under these conditions, develop with indispensable serenity the policies necessary to meet the demands of the marketplace and the evolution of technologies.
These few principles, shared by the management team, and which we would endeavour to disseminate to every subsidiary, guided our actions. The strategy announced at the time of the privatization was rapidly put into effect.
Three principal business lines were maintained: Telecommunications, energy and transportation, and services. With respect to each, we needed to attain the critical size. For the activities which did not fall into these areas, it would be necessary to look for solutions outside the group in order to guarantee their future, while at the same time assuring their development. But it would especially be necessary to reinforce, in a lasting way, the independence of the group and, therefore, do our best to shelter it from a hostile takeover. The best way to achieve that was a matter of common sense. The market capitalization had to be dissuasive and unity within the group meaningful and significant. At the time the market wasn’t calling for the “creation of value,” but simply profits and a credible strategy. That resulted in two guiding principles for group management: Improve profits in every area and seize every opportunity to increase the number of shares. From this came a need for greater profitability to ensure regular increases in earnings and stock dividends, thus increasing the number of shares.
We will see how these conditions could be brought together and how the group would go, in five years, from a market capitalization of 23 billion francs at the time of the privatization (70.5 million shares, with an opening price of 323 francs) to 94 billion francs (135.5 million shares at a price of 692 francs in December 1992)—that is, during this period the number of shares practically doubled, as did earnings per share (27 francs in 1987, 53 francs in 1992). The market price per share also doubled between those two dates, while the CAC 40 index increased by only 25% during the same time period.
As with telecommunications, the energy/transport sector had to be strengthened. It was a traditional business of the group—even an historical one since, from the group's creation in 1989, the production of energy (nationalized in 1945) and the manufacture of equipment for the production and transmission of electrical energy constituted its main business activity.
Alsthom, a subsidiary of the group listed on the stock market, was proud of its past as well as of its reputation and was protective of its autonomy which certain people hoped to transform into independence. On the other hand, Alsthom was conscious of the need to evolve. I had no problem getting Jean-Pierre Desgeorges, Alsthom’s CEO, to subscribe to the policies that I sought to implement, and in fact I am very grateful for the determination and imagination which he showed during these years.
Thus, in 1986 Alsthom took control of Sprecher Energie in Switzerland and acquired the railway activities of Jeumont Schneider. The following year it acquired Bergeron, a specialized pump company in France, and 49% of Turalmex, a Mexican manufacturer of turbines and alternators. In 1988 Alsthom took control (51%) of ACEC Energie in Belgium (a division of the former. Ateliers de Construction Electrique de Charleroi). At the same time, Alsthom sold its diesel motors business and its low tension switchgear activities, in which its market share was too insignificant for it to be competitive.
But the big transaction for Alsthom during this period was the agreement with the British company GEC (General Electric Company). Negotiated and concluded in nine months, it would represent the beginning of a new era in Alsthom’s existence.
CGE and GEC decided, by an agreement signed June 29, 1989 but taking effect retroactively on April 1, 1989, to merge their electromechanical engineering businesses—that is, Alsthom for CGE and the Power Systems Division of GEC. The new entity, christened GEC Alsthom, had sales of 47 billion francs and 85,000 employees, of which 43% were in France, 30% in Great Britain, 10% in the other European countries, 12% in Asia, and 5% in the rest of the world.
CGE and GEC each held a 50% interest in the holding company incorporated in the Netherlands. This principle of equal control blocked the negotiations for a time. In terms of total sales, the French contribution was larger, but the British businesses were more profitable. For psychological reasons, the British insisted on equal shares. We believed the agreement was the only conceivable way that Alsthom could acquire a place among the three or four top manufacturers in the world. Also an interest in the business project pushed us to accept this 50-50 shareholding. This arrangement is never a very comfortable one but can be workable if the management structure is such that it is possible to act when disagreements arise among the shareholders.
Pursuant to Dutch law, an eight member supervisory board was created, half of the members of which were selected by each shareholder, and a five member board of directors, three nominated by CGE and two by GEC. The management headquarters, along with the board of directors, would be located in Paris at Alsthom’s traditional headquarters facility. It was agreed that the first chairman of the supervisory board would be Lord Arnold Weinstock, GEC’s Managing Director, and that I would also be a member of that board; the first chairman of the board of directors would be the chairman of Alsthom, Jean-Pierre Desgeorges. The board of directors would make its decisions by a majority vote of its members. In this way, any risk of deadlock was eliminated with respect to day-to-day operations. Broad strategy, of course, fell within the province of the shareholders. I must say that, except for one occasion to which I will return, we were always able to reach an agreement with GEC, sometimes even against the advice of the board of directors.
We concluded the final agreement on the last Friday before Christmas in December of 1988 at the end of a long day of intense negotiations. As I was leaving Lord Weinstock’s office very late, he wished me a relaxing weekend and a Merry Christmas. Those days were particularly difficult for me, I responded, because I was going to Besançon the following morning to attend the burial of my brother, two years my senior, who had died after battling a merciless illness for several months. Lord Weinstock scolded me for not having made him aware of this earlier, as he would have changed our negotiating schedule. But I always operated under the principle that my personal and family constraints were to be set aside when faced with professional requirements.
During these years I got to know and rapidly came to hold in high esteem the rich personality of Lord Arnold Weinstock, the original founder of his group, whose professional career, marked by continuity and success, was very impressive. I very much appreciated his constant concern (never compromised by the desire for fortune or privilege) of rigorous management, sometimes, to the chagrin of the operational managers, delving into the smallest detail. Like Napoleon, he thought that “la religion du succès est le culte du détail” (the religion of success is faith in the details). But that did not prevent him from having a great strategic vision which, in fact, we often discussed, not only in connection with GEC Alsthom but also in other respects. Mutual confidence having developed between us, I think that if we would have had the time, we would have been able to extend the alliance between CGE and GEC to the telecommunications area and especially to defense, thereby creating a first-rate, high technology European group with solid British and French roots. But destiny didn’t allow it and, as a result, I fear, the British and French industries lost an opportunity to make a difference in the world of tomorrow.<
GEC Alsthom, from the time of its creation, structured its activities into nine divisions, by product line regardless of the company in each country where the activity resided: Power plants (engineering of thermal or hydraulic power stations) represented 10.7% of total sales. Electromechanical engineering (steam turbines, alternators, motors, compressors, pumps and valves) – 18.5%; boilers (industrial or for thermal power stations) – 8.1%; gas turbines ranging from 2 to 212 MW, products for the future – 6.6%; high and medium-level tension equipment for the transmission and distribution of electrical energy – 14%; transformers – 10.6%; rail transportation, the subway, tramways of all types except diesel locomotives, signaling – 19.1%; robotics and varied equipment – 6%; finally, Chantiers de l’Atlantique, a shipyard which manufactured cruise ships and specialty vessels – 6.4%.
GEC Alsthom quickly became completely operational and its original organization underwent few subsequent changes. The group was positioned among the three or four world leaders in its principal lines of business—the production and transmission of energy and railway transportation—with strong points but also with weaknesses. As a result, it had a two-pronged strategy: Achieve synergies from the merger but pursue external growth and the elimination of activities outside the company's main lines of businesses.
In the energy field GEC Alsthom took control, in 1989, of the German company EVT, which specialized in solid fuel boilers, and agreed to acquire the gas turbine activities of AEG, which had been put into a subsidiary called Kanis, of which GEC Alsthom took 55%. In the beginning of 1990 the gas turbine activities of GEC Alsthom were put into EGT (European Gaz Turbines) of which General Electric (the American company and the world leader in the field) took 10%. Alsthom had been a licensee of General Electric for a number of years and was able, that year, to renew its license for 20 years, thereby ensuring its technical security for the long-term. But during those negotiations we sensed a toughening of the position of our contracting partner who apparently wanted, in the future, to reduce the freedom granted to its licensees and to limit the transfer of technology in the most sensitive areas. This reluctance was evidenced in particular in the role allocated to GEC Alsthom in the joint development of the new generation of turbines. So it appeared to me to be very probable that GEC Alsthom could not rely on the license agreement to assure its future in this field. GEC contributed its capabilities in research and development, but GEC Alsthom had to strengthen its own efforts. I had a difficult time convincing management of the need to undertake an effort so far out into the future.
GEC Alsthom also made acquisitions in the railway field, but more for commercial than technical reasons. The European markets remained very closed and to get orders from nationally owned railroads it was necessary to have some local participation. In 1989 GEC Alsthom took over successively the railway activities of ACEC in Belgium, of Metro Cammel in Great Britain, specializing in rail equipment engineering (thereby gaining access to the British Rail market and to the London and Hong Kong subways) and, finally, of three Spanish companies specializing in maintenance—Maquinista, Ateinsa, and Meinfesa—thereby permitting GEC Alsthom to become the principal industrial partner for the plan to renovate the Spanish railways. Despite the enormous and costly restructurings that GEC Alsthom had to take on in Spain, that strategy would turn out to be fortunate and its most brilliant success was the supplying of high speed AVE trains connecting Madrid with Seville. This event was inaugurated ceremoniously by the king during the 1992 World Expo.
The TGV is, of course, Alsthom’s most prestigious accomplishment. The concept of a high speed train in a new infrastructure but under norms compatible with those of the traditional rail networks dates back to the 1960’s. Credit for that goes to a small team of visionary and persistent engineers and economists at the SNCF and Alsthom who carried out this project despite scepticism in certain circles and the actions of parties with opposing interests. It must not be forgotten that the 1960’s saw the initial flights of Air Inter, which had been granted a monopoly for national air service within France, except for the Paris-Nice line, which was also served by Air France. The unveiling in 1981 of the new track connecting Paris and Lyon unquestionably opened a new era of railway passenger transport. The commercial success met with the technical success.
I had the opportunity to participate in the setting of the world record for railway speed by an Alsthom (GEC Alsthom at that time) train on May 10, 1990. The SNCF used a 30-mile stretch of the new Paris Atlantique railway line, before its opening for commercial service, to conduct trial speed runs during a ten-day period. The train that established the speed record only consisted of standard equipment—it was simply shorter (thus less heavy) and the locomotive was equipped with wheels having a slightly larger diameter. I participated in the last trial run before the one that had been planned to establish the record with the Minister and the chairman of SNCF aboard.
In the cockpit of the locomotive the two invitees didn’t disrupt the work of the three-man team responsible for making the trial run—SNCF’s program director, the conductor, and an Alsthom engineer. In a car at the stern a laboratory recorded all the movement parameters but only standard technical indicators were posted in the cockpit, with, however, a larger screen for the speed. The trial run lasted at most a quarter of an hour. When we departed the locomotive accelerated progressively, with maximum power of course. We were quickly startled by the movement of the track, the catenary, and various pieces of equipment. Tension mounted visibly in the faces of the team members as the speed exceeded 250 miles an hour, but there was a complete sense of stability and security. Every one was observing the figures displayed on the tachometer when all of a sudden we all sensed an abrupt drop in acceleration. Puzzling looks were exchanged momentarily and then the speed picked up again. The experts concluded that there was probably a problem in the electrical supply, most likely with the catenary. The Alsthom engineer said the trial run could continue and the program director agreed, so the acceleration picked up again to full speed. This lasted, in all, less than 15 seconds. That day the TGV attained the maximum speed of 310.7 miles per hour, the world record to that date. It would be raised during the official trial run ten days later to 320.45 miles an hour. I later learned that, in order to leave a margin for the official trial run, the program director had purposely ordered that deceleration commence several kilometers before the train reached the point on the test track where the breaking distance started. An expert study of the trajectory of the train that day leads one to think that if the program director hadn't received orders to break early the TGV would have reached a speed of 322 or 323 miles an hour.
As a result of this test run the SNCF earned a lot of praise. The Alsthom technicians deserved to receive more credit for this success. I had observed how in a critical moment their cool headedness, combined with their expertise, was equaled only by their modesty. What goes on behind the scenes of an accomplishment is never sufficiently known. It is however in these circumstances that one is able to see the true hierarchy of values.
The agreement with GEC had a repercussion for CGEE Alsthom. That subsidiary, specializing in electrical engineering, was active in three complementary fields: The electrical business (installation of posts, lines, etc.); industrial control (automatization, regulation and supervision of manufacturing processes); and technical assistance services. As already indicated, the electrical contracting function, in my opinion, was radically different from ordinary industrial activities and needs to operate autonomously, even if its services often are accompanied by the sale of products. Alsthom general management never accepted this point of view and constantly sought to absorb the engineering function or to recreate it in-house. The negotiations with GEC provided an opportunity to make another attempt. I succeeded in convincing the chairman of GEC of the validity of my point of view. As a result, CGEE Alsthom was not contributed to GEC Alsthom. To the contrary, in 1989 GEC contributed to CGEE Alsthom its industrial control activities in Great Britain and the United States and received in exchange a 22% interest in CGEE Alsthom.
That company, which was one of the principal activities of the group, developed a steadfast policy of acquisitions. For example, in 1987 it acquired General Electric's North American high voltage direct current business and patents and in 1989 it acquired the system control activities of ACEC.
In 1987 CGE held other subsidiaries and investment interests—Framatome first of all, but also CEAC and Saft, which manufactured and sold batteries.
At the time Framatome’s capital was divided between CGE (40%), Dumez (12%), CEA Industrie (35%), EDF (10%) and the employees (3%). Framatome was a real French star and was one of the world leaders in nuclear power plants. I considered it as a strategic investment for CGE. The investment perfectly complemented Alsthom's lines of business, which furnished the conventional portion of nuclear power plants and which could offer all other types of power plants which produced energy (hydraulic, coal, oil and gas). Moreover, power plant manufacturers outside of France were incorporated into the big electromechanical groups (General Electric, Westinghouse, Siemens, etc.)
In France it was different. First of all because EDF,1 along with the other state controlled utilities equipped with strong technical service departments, preferred to order equipment in separate blocks; whereas abroad orders were generally given for complete installations. Secondly, and perhaps more importantly, France was different because of the rivalry between the public and private sectors, a characteristic uniquely French, even Gallic, which often surprises foreigners.
This political and cultural context created an impediment from which Framatome could never escape and, I'm convinced, permanently compromised its future.
Framatome had been created as a private company. After some reshuffling of its shareholders and the wave of nationalizations in 1982, Framatome found itself controlled by public sector companies. But CGE’s privatization in 1987 returned the majority of its capital to the private sector. That was one of the reasons for the Socialist Party’s hostility to CGE’s privatization. In 1990 Dumez wanted to withdraw and CGE bought its 12% interest in Framatome. With that transaction Framatome became a controlled subsidiary of CGE.
Framatome’s general management, led by Jean-Claude Lény, its skittish chairman, had no trouble starting a political campaign against CGE’s assumption of control. It wasn’t a matter of ideology because the company had adapted well to private sector practices. The managers (except one) and the employees had participated without hesitation in the stock option programs and employee stock offerings that were offered by CGE, and were gladly integrated into the private sector wage structure. Framatome management simply refused to be integrated into an industrial group which had the size, experience, and the complementary businesses to guarantee its future.
The political campaign became lively. A law to renationalize CGE was proposed by the Socialist majority of the National Assembly. The opposition let me know that they would not go to battle against this initiative. The only option left was to seek the least disagreeable compromise possible while waiting for better days. Pierre Bérégovoy, the Minister of Finance, wrote me on June 12, 1990, that “… [t]he public authorities consider that the company, because of it’s nuclear activities, must be majority controlled by state-controlled shareholders. I was, therefore, assigned the task, in the name of the government and of the Prime Minister, and under instructions from the President of the Republic, to make you aware of this position and to determine with you the conditions for Framatome’s return to state control.” In fact, even though the minister's letter indicated that Mr. Haberer, chairman of Crédit Lyonnais, was given this responsibility, it was the Finance Ministry, and in particular the Treasury, that led the negotiations for the government.
The people with whom I dealt were well aware of the archaic nature of the debate and they invented a formula which kept the appearance of state control without actually having Framatome enter into the public sector and submitting it to its rules. They called upon Crédit Lyonnais, a nationalized company, to take 6% of the capital of Framatome, thereby putting the state's share over 50% (with the 35% of CEA and the 10% of EDF). CGE’s part was reduced to 44% and that of the employees increased to 5% to compensate for the battle they waged on behalf of the public sector. The malicious nature of the arrangement went undetected. Crédit Lyonnais classified its Framatome shares under the heading of financial investments for its general banking activities, which didn’t fall within the scope of the definition of the public sector. In this way this shaky arrangement satisfied the protagonists. The majority of the capital was certainly held by the public sector, but the company wasn't part of the public sector as such. In reality, the management and employees had solidified their independence at the expense of Crédit Lyonnais and, therefore, the government. CGE found itself going from a 40% share in the capital to 44%, having realized a capital gain, and I hoped to be in a better position one day to integrate Framatome into the group in a lasting way in order to benefit from its synergies with Alsthom. The reader will see that that hope would never be fulfilled despite subsequent political changes. Management’s “allergic reaction” would lead it to align itself with Siemens and not to hesitate to have the German manufacturer intervene with the government of France to head off CGE's plans. It can be really difficult to build an industrial group at the level of great world competitors in the country of the Gauls!
During these negotiations I had a surprising discussion one day with Pierre Bérégovoy. It was in the beginning of 1991. I was waiting, together with the other participants, in the anteroom because that morning the meeting was going to be held in the minister’s office. Pierre Bérégovoy asked me to come in alone. After the exchange of a few trivialities, he asked me straight off: “Would you engage French troops in military operations in Iraq?” Although I didn’t find out until later, we were only a few days away from the allied invasion of Iraq. Flabbergasted, I responded that I didn’t have the information necessary to make such a decision but I thought that if France had so ostensibly positioned elite troops in the field, hopefully adequately equipped, and France had made the choice a number of months earlier to follow the U.S., I couldn't imagine that France would refuse to participate in military operations at the last minute. Visibly relieved by my response, he thanked me and added that he had left a meeting where he was the only one to defend that point of view! Even after a number of years, I’m still amazed by that conversation.
In the batteries line of business, CGE had, in 1987, 3.7 billion francs in sales (3% of total sales) thanks to two subsidiaries: Saft for alkaline and technical batteries; and CEAC for lead batteries. In both cases the market share was small and with respect to lead batteries there was little connection with the rest of the group. Nevertheless, the general strategy applied to these secondary businesses: They needed to be developed to increase their value even if eventually, after waiting for that to happen, they would be transferred to some external alliance.
In 1987 Saft reinforced its position in industrial and rail nickel cadmium batteries by acquiring the British company Alcad, as well as its American subsidiary. The same year CEAC acquired the Italian company SAEM, the fourth Italian supplier of automobile batteries. In 1989 CEAC bought the British group Chloride (traction batteries), and in the beginning of 1990, the Belgian company Accumulateurs Tudor. Later CEAC would find itself included in an agreement with the Agnelli group, which will be discussed later.
Also in 1987 we decided to get out of the industrial ceramics and glass isolator lines of business. These had been in the group a long time but we had let them fall behind. The specialized subsidiary Ceraver was sold to the Italian group Participazioni Finanziarie e Industriali.
In the services area, outside those included in CGEE Alsthom, CGE had banking activities (Electrobanque) and an insurance brokerage business (Electroassurance), whose customers came almost exclusively from within the group. We also had a line of business (through Locatel) involving audio-visual equipment rentals (essentially television sets).
CGE also had La Compagnie Electrocommerciale, which sold all kinds of electrical equipment through its subsidiary CGE Distribution and electronic and computer components through its other subsidiary, CGE Composants. These distribution activities, originating in a former sales agency network of CGE, had been managed over-cautiously and the group had not participated in the significant mergers and acquisitions trend which had produced powerful companies with significantly better purchasing and distribution capacities. In 1987 it was certainly difficult to get back into the ball game. We tried, nonetheless, to gain a share in the market by initiating several acquisitions, such as the acquisition of Saporta in 1989; but we finally decided to withdraw from this line of business with dubious profitability. CGE Distribution was sold in 1990 within the framework of some agreements with the Dumez group; and CGE Distribution found itself, in 1991, integrated into the Sonepar group, one of the European leaders in electrical distribution.
The engineering line of business activities, assembled under the Sogelerg banner, with which I had been familiar since my early years in the group, included since that time civil and industrial engineering, all under the Sogelerg name, and activities related to hydraulics under the traditional name of Sogreah, which had become a subsidiary of Sogelerg. The engineering group had changed its chairman several times over recent years, relying on external recruiting despite the recommendations that I had made to promote Pierre Bonafé, a manager with unquestionable experience and authority. One of my first decisions in 1986 was to appoint him to head up Sogelerg, which he would bring to life and develop magnificently until 1993, when I gave him the heavier responsibility of managing CGEE Alsthom (which had become Cegelec), which needed an entrepreneur in the most complete sense of the term. I knew that these were the qualities needed to succeed in engineering. Pierre Bonafé also knew how to brilliantly make Cegelec progress in all its domains, including in its financial performance.
But in 1987 the main development in the services area was the increase in CGE’s participation in Générale Occidentale. With 41% of its capital, CGE became its principal shareholder. Générale Occidentale, with sales of 19 billion francs, had interests in communications, a field in which we were interested, but also in supermarkets (Grand Union) and in forest land and oil prospecting.
Ambroise Roux took over as chairman of Générale Occidentale and successfully set out to strengthen the communications area and to disinvest the other businesses. That’s how, at the end of 1987 or in the early months of 1988, Grand Union was sold, as well as the other American investments. The communications activities included, besides the Express group which operated in the general news area (685 million francs in sales), the Presses de la Cité (controlled with 57%) with sales of 2.6 billion francs in publishing and distribution (especially by France Loisirs, the subsidiary held jointly with the German group Bertelsmann). Various acquisitions were concluded in 1987 and 1988. An agreement signed in February 1988 with CEP Communication in the publishing field gave birth to the Groupe de la Cité, the second leading French publisher and one of the ten world leaders with sales of 5 billion francs. After that agreement Générale Occidentale had become the second most significant shareholder of CEP Communication after Havas. CEP and Générale Occidentale held equal shares in the holding company Hoche Friedland, which brought with it the joint control (at 73%) of Groupe de la Cité.<
That investment in Générale Occidentale provoked sharp criticism from the Socialist Party. CGE was accused of misappropriating funds received at the time of its capital increase and to use them to take control of a general news magazine instead of using those funds for the company's business needs. People had trouble adopting to a CGE which was independent of government control and at the time the general opinion had not been sensitized to the probable convergence of the telecommunications and communications worlds. Multimedia didn't spring from the laboratory.
Générale Occidentale, which was listed on the stock market, presented another interest for the group. As was the case with the other subsidiaries traded on the stock market, it could, if circumstances permitted, contribute to CGE’s capital increase. I have already indicated that this was our first objective to reinforce the independence of the group.
At that time minority shareholders accepted their position vis-à-vis majority shareholders and the markets in Europe did not demand equal treatment among shareholders, which was very different from the requirements of the American stock exchanges. This situation didn’t suit me. I considered in effect that CGE, an industrial group, had to take decisions for its subsidiaries regarding restructuring or the sharing or allocation of lines of business without constantly seeking the opinion of outside experts to ensure that in these exchanges the minority shareholders were not injured. The only way to achieve this unity of interests with respect to the listed subsidiaries was to buy out the minority shareholders or to offer to exchange their shares for CGE shares. This policy also brought me criticism, including from the honorary chairman of CGE's board. He told me that withdrawing companies from a public listing would weaken the Paris Stock Exchange. He seemed to forget that the capital withdrawn from the market was in fact being transferred to the mother company and that the market for its shares would increase in volume and liquidity to the benefit of its shareholders.
In 1987 twelve subsidiaries of the group were listed on the stock market in France or abroad: The holding companies Compagnie Financière Alcatel and Compagnie Electrofinancière, Générale Occidentale, Alsthom, Saft, CEAC, Electrobanque, Locatel, Les Câbles de Lyon, Presses de la Cité, SEL in Germany, and STK in Sweden.
From the time of the preparation for CGE’s privatization, I had hoped, as I indicated earlier, to withdraw the shares of Compagnie Financière Alcatel from the market; however, the government, which was totally preoccupied with the complexity and dimension of CGE’s privatization, wouldn’t allow it. The following year I reinitiated my proposal, with the objective of avoiding an indirect listing of Alcatel, but also of increasing CGE’s capital by offering the Compagnie Financière Alcatel shareholders to exchange their stock for shares in the parent company. In the meantime, the political majority and the government had changed and if there was no question of undoing the nationalizations that had been completed or to proceed with new ones (the so-called "neither-nor" policy—but the reader will note that the "neither-nor" policy did not prevent the "renationalization" of Framatome), Paris was nonetheless buzzing with rumors and work was being carried out on the shares of certain privatized companies
On June 10, 1988 I received a gratuitous warning. Before launching the public offer of exchange between Compagnie Financière Alcatel and CGE, and though I wasn't required to, I nevertheless felt that I should, as a courtesy, notify the Minister of Finance and the Prime Minister of the transaction. I went to see their chiefs of staff on the rue de Rivoli on June 10 and at Matignon on June 13. I had barely started to present the project when Alain Boublil, Mr. Bérégovoy’s chief of staff, interrupted me saying, “I forbid you to do it.” Taken aback, I pointed out that I had not come to request authorization because the transaction was within the decision-making power of CGE and the stock market authorities. I tried to explain to him CGE’s reasons for withdrawing Compagnie Financière Alcatel from the stock market. Nothing worked. He accused me of wanting to “verrouiller” (lock up) the capital of CGE and to reinforce the “noyau dur.” (these were his expressions), whereas the transaction would, in fact, dilute the noyau stable” and put the new shares into the hands of new shareholders. I found him to be stubborn and greatly annoyed. At the time I thought it was simply a resurgence of the hostility that his boss had always had regarding the privatization of CGE. The meeting turned out to be brief.
Three days later I explained what happened to Jean-Paul Huchon, the Prime Minister’s chief of staff. That discussion was a lot more open. He told me to complete the transaction if I deemed it good for CGE, but not to overlook the hostility of the Finance Minister’s office, and to avoid any attitude that could be seen as provocative. He suggested that we remain in contact.
Since there were unusual movements in CGE's stock, we determined it would be better to put off the exchange offer to calmer days. It would be saved for the following year.
During subsequent weeks the market did in fact turn lively. Noting increased transactions with respect to CGE’s stock and alerted by the ukase from Alain Boublil, I returned to see Jean-Paul Huchon on July 28. I made him aware of our observations and of my suspicions of a hostile attempt to buy up CGE's shares and told him that if these purchases continued through Monday (it was Thursday), I would have to speak publicly and denounce the attack that was planned. He then called the Prime Minister and Michel Rocard, without the slightest fanfare, joined our meeting. He listened to our explanation of the facts for several minutes and then instructed Jean-Paul Huchon: “Call Bérégovoy; tell him again on my behalf that I want these attacks to stop, as I already requested.” In fact, order was then restored to CGE's stock. Later, in adding things up, we concluded that the raid led in the fall by George Pébereau and Marceau Investments against Société Générale, with the help of public money and backed by the Finance Minister’s office, was first directed against CGE and then reoriented towards the bank, CGE's principal shareholder. That transaction resulted in an in-depth judicial inquiry, which has long since been terminated. The investigative file would perhaps shed light on the fluctuations of CGE’s stock in July 1988.
That alert reassured me in my determination to give priority to defending the independence of the group by increasing its capital. This development and ultimately the failure of the takeover bid against Société Générale showed the usefulness of having a stable core of shareholders. Some years later the agreements among the core shareholders (which were, incidentally, legal but have for the most part lapsed) would fall out of favor; and the market, in the name of the principles of transparency and equality among shareholders, would reject them. It is nonetheless true that these agreements preserved the independence of Société Générale in 1988-1989 by preventing a raid for which the obscurity of its objectives, the interests in question, and the indirect intervention of public money prevented it from being a true stock market operation. CGE honored, as it had to, its undertakings and participated in the defense of the bank at the request of its chairman. The result of that for the group was an enlarged investment which generated substantial capital gains in subsequent years.
An anecdote comes to mind. It sheds light on the unscrupulous intervention by public authorities in private companies and on the oblique methods which they use. On November 28, 1988, I was returning from a long trip to Japan and the Far East directly to Brussels where I was scheduled to meet with the Belgian Prime Minister in the afternoon. As I was leaving the plane, a driver gave me an urgent letter from Marc Vienot, Société Générale’s chairman, brought specially from Paris. “Forgive me for disturbing you just as you are landing, but events are speeding up with respect to Société Générale and, no doubt, CGE as well. Fearful of not being able to reach you by telephone today, I am sending you this note because it’s a matter of urgency.” He enclosed with his letter a copy of an article that had been published in Le Monde dated November 27-28 under the heading: “Appealing to nationalized companies, Mr. Bérégovoy relaunches an offensive against Société Générale.”
CGE’s board of directors had decided during its November 10 meeting to issue convertible bonds in the amount of 3.1 billion francs, since market conditions appeared favorable. The transaction was to be announced at the end of the month and closed on December 31, 1988. In an exercise of caution I had asked and obtained from the board the ability to postpone the offer for up to 45 days.
Word of the planned issuance got to the Finance Minister.
In his urgent message, the chairman of Société Générale had added:
"It will be necessary to postpone to January the issuance of convertible bonds that you contemplate. There’s a risk in the current environment to heat things up. Bérégovoy called Jean-Marc Vernes, getting him out of a board meeting, to express his ‘indignation’ to learn that CGE helped Société Générale in resisting its assailants."
Marc Vienot next described the actions of Ambroise Roux as well as those of Jean Peyrelevade, UAP's chairman and a director of CGE, always eager to play their mythical godfather roles in the business world. He concluded peremptorily: "This excitation of Bérégovoy prevents us, in my opinion and in our mutual interest, from announcing the contemplated transaction before January."
I submitted partially to the request of this shareholder in difficulty. Using the authority given me by the Board, I postponed the convertible bond offering for one month. (It closed on February 1, 1989.)
Life for the newly privatized companies clearly was not easy, especially for those which were exposed to public condemnation or which were the object of private desires—the two motivations that were intertwined in the case of Société Générale and CGE.
As to CGE’s capital, 1988 wasn’t a complete loss. The number of shares increased slightly, mainly by the conversion of dividends into shares, to 71.8 million, as compared with 70.5 million after the privatization. But CGE had issued 250 million ECUs of convertible bonds which were capable of creating 5 million additional shares.
The year 1989 was more favorable and we were able to successfully conclude, besides the issuance of convertible bonds launched at the end of 1988, a twofold operation which, in addition, simplified the financial structures of the group. The June 1989 annual shareholders meeting approved, with retroactive effect back to January 1, 1989, the absorption of Compagnie Financière Alcatel (held at 61.5% by CGE) as well as Alsthom (held at 67%), which had just become a simple holding company after having contributed its industrial assets to GEC Alsthom. These absorptions would follow the same procedure as the one used by Alcatel CIT after the creation of Alcatel NV two years before. That double absorption created 24.9 million new CGE shares.
It was during that period also that the final relationship between Alcatel NV and CGE was determined. In 1987 the possibility of a future listing of Alcatel NV was left open. It would in particular provide a solution if ITT ever wanted to sell its Alcatel NV shares after its lockup period terminated. Considering the weight of telecommunications in CGE’s business activities (at least two thirds), it seemed to me that an independent listing of Alcatel NV could only result over time in the loss of control by CGE, which would have difficulty raising the capital required to provide the necessary financing for its subsidiary because of the low rating which the stock market gave to holding companies. It was better to transfer to CGE the good high tech image which Alcatel NV had in the marketplace and, in doing that, eliminate minority shareholders whenever possible and thus be able to raise directly (and without the bad holding company image) the capital that was needed for telecommunications development. To do that a change in CGE's name would prove to be very useful. We will get back to that.
That strategy was first applied in December 1989 when CGE and ITT together acquired the 5.2% interest that the Société Générale de Belgique had in Alcatel NV. (Société Générale de Belgique had just fallen into the hands of Suez.) ITT then exchanged the Alcatel NV shares which it had just acquired for CGE shares. In this way CGE increased its control of Alcatel NV from 56.3% to 61.5%. In 1990 another phase was carried out: CGE acquired Crédit Lyonnais’ 1.5% interest, as well as 7% of ITT's participation. As a result of this transaction, ITT's share of Alcatel NV was reduced to 30% and CGE henceforth held 70%.
In 1990 Générale Occidentale merged with Electrofinancière. CGE held 57% of the new company, which remained a listed company. As a result of this transaction CGE took control of Générale Occidentale. In 1991 CGE, having become Alcatel Alsthom, successively absorbed Générale Occidentale (creating 8.4 million new shares of CGE stock), Saft (creating 1.3 million new shares) and, after two public exchange offers, increased its control of SEL in Germany to 98% and of Electrobanque to 99%. Those two companies were delisted. After these transactions, as well as others of less significance (payment of dividends in shares, employee stock offerings, stock option plans reserved for managers), Alcatel Alsthom’s capital consisted of 120.6 million shares at the end of 1991.
In 1992 the last phase in the integration of Alcatel NV (and a symbolic one) was undertaken. CGE acquired the 30% interest held by ITT, which received in exchange 9.1 million new shares of CGE, now Alcatel Alsthom. (ITT agreed not to sell those shares for four years.) In addition, ITT was paid $2.583 billion, payable over three years at the rate of $1 billion in July 1992, $767 million in July 1993, and $816 million in July 1994. With the same miscellaneous transactions that took place the prior year to increase the number of new shares, the group's capital consisted, at the end of 1992, of 135.5 million shares.
In parallel with these stock market transactions, the group proceeded during this period to buy out numerous minority interests in non-listed subsidiaries.
As a result of these unremitting and persevering policies, the group not only quadrupled its market capitalization but also gained coherence while improving its profitability.
Between 1987 and 1992 net income went from 3.39 billion francs to 8.45, but the group’s share increased more rapidly from 1.83 billion to 7.05 billion francs, because out of the total net profits, the share for minority interests during the period went from 46% to 16%. That reduction of minority interests also showed up in the balance sheet equity. At the end of 1987, out of a total of 26 billion francs in equity, 16 billion belonged to shareholders of the top holding company and 10 billion to various minority interests of subsidiaries. Five years later these interests were radically different: 50 billion francs in holding company shareholders equity, compared with only 4 billion for minority interests, making a total of 54 billion on the consolidated balance sheet.
In this way the group, on a financial level, progressively won its independence and acquired the size to be a first-rate player on the international economic scene. The May 20, 1992 listing of Alcatel Alsthom stock on the New York Stock Exchange symbolically marked that entry into the sphere of world leaders. At the time very few French companies were listed on the New York Stock Exchange.
But this enlarged financial size constituted more a condition necessary for the success of the group than an end objective for its shares. I was never able to reduce the object of a company to the creation of shareholder value, as many seem to do—and even to boast about—today. For me a company is first and foremost a collection of people who participate in the same economic undertaking and who, if all goes well, not only obtain a livelihood for themselves and their families, but also take pride in building something of value. I know that this deep sentiment of solidarity develops more naturally in the more traditional industries, where each employee can see and touch the result of the collective effort, than it does in services or computer centers. As the collective body gets larger it's also more difficult to create and maintain this cohesion of will which is so indispensable to success. That, however, is what I sought to do in order to consolidate CGE from within. So in 1990 I thought the time had come to stimulate the spirit by changing the name of CGE and by giving a common name to all of its subsidiaries. The time has come to talk about Alcatel Alsthom.
 EDF is the electric power company in France, owned by the French government. (Translator’s note)
It has already been pointed out that the reference to "rue de Rivoli" refers to the street in Paris where the Ministry of Finance was located. The reference to "Matignon" is to the Paris office of the Prime Minister. (Translator's note)
 It will be recalled that the noyau dur refers to the blocking core shareholders. The noyau stable are the other, stable shareholders. (Translator’s note)
 Jean-Marc Vernes was neither a director nor a shareholder of CGE and had no other business relations with us. But perhaps he had them with Pierre Bérégovoy!