UPDATE) Investors Applaud French Alcatel's Metamorphosis To High-Tech Firm
Dow Jones Online News, Friday, August 07, 1998 at 12:36
By Douglas Lavin, Staff Reporter of The Wall Street Journal
PARIS -(Dow Jones)- Investors world-wide are betting heavily on
European corporate restructuring. And one of their favorite companies is
Alcatel-Alsthom SA, France's once-struggling
trains-to-telecommunications conglomerate that is reinventing itself as
a high-tech company.
But a look at Alcatel's (ALA) transformation over recent years offers
a sobering lesson for investors hoping for a European remake of
America's economic resurgence: Restructuring in Europe, though very
real, isn't as fast, bold or bloody as in the U.S.
It is true that changes at Alcatel have been dramatic by European
standards. The company has sold off vineyards and magazines, has partly
spun off its train and turbine unit and is expanding its satellite
operations. The divested businesses represent a total of about 40% of
Alcatel's revenue.
But Alcatel can't sell off its 44.1% share of Framatome, the French
maker of nuclear-power plants, because the state doesn't want it to. Nor
can it shed low-margin parts factories without inviting uproar from its
unions. Efforts to focus the company on technology have been balanced by
retaining huge investments in unrelated but stable businesses.
Of course, there are plenty of reasons to bet on changes in Europe.
The continent's economies are growing, inflation is low, notions of
shareholder value are spreading, and it looks as though deregulation and
restructuring will accelerate with the birth next year of the euro,
Europe's common currency.
But corporate restructuring won't change the bottom line in Europe as
much as in the U.S. American restructuring in the 1980s helped push
return on equity - a common measure of performance - to a level of about
20% today, from about 10% in the early 1980s, says Peter Sullivan,
European equities analyst at Goldman, Sachs & Co. in London. Sullivan
says he expects European profit levels to remain in the mid-teens for
the next five years, thanks to what he describes as "more evolutionary"
restructuring efforts here.
When Alcatel Chairman Serge Tchuruk took over in 1995, he told senior
management "what this company needs is discipline and new ideas. I'll
provide the discipline." In transforming Alcatel from a conglomerate
into a high-tech company, Tchuruk is implementing a commonsense strategy
that proved successful when he was chairman of Total SA, the French oil
company: shift emphasis within the group toward higher-profit and
higher-growth areas.
"A management team can only really focus on one business," Tchuruk
said, explaining decisions at Alcatel to sell off part of a turbine
company, a vineyard and two of France's most prominent news magazines,
L'Express and Le Point.
The restructuring began in 1994, before Tchuruk's arrival, when
Alcatel began scrapping a system of regional fiefs and reorganized along
product lines. But change has accelerated under Tchuruk, culminating
when Alcatel in June sold off most of its interest in its trains and
electricity joint venture with Britain's General Electric Co. PLC, as
part of the venture's $3.75 billion stock flotation that created what is
now Alstom SA.
Alcatel also announced the purchase of DSC Communications Corp. of
the U.S. for $4.4 billion in stock. And it put the finishing touches on
a new satellite company formed through the merger of its satellite
operations with those at defense-electronics company Thomson-CSF and
French aeronautics leader Aerospatiale SA.
The refocusing effort won praise from analysts and investors.
Alcatel's stock, which closed at 451.80 French francs ($76.13) on May
31, 1995, when Tchuruk was named chairman, has since more than doubled
in value, closing at 1,136 francs in Paris trading Thursday. Similarly,
Alcatel's earnings of 4.7 billion francs ($792 million) last year are
far from its 1995 record loss, the largest ever posted by a French
company, of 25.6 billion francs.
Last month, Salomon Smith Barney named Alcatel one of its 15 global
stocks of the year, largely on the strength of its efforts to reshape
itself, and Morgan Stanley Dean Witter & Co. has picked Alcatel for a
key European portfolio.
But what is remarkable is how much remains untouched. At a time of
booming growth in the world-wide telecommunications market, Alcatel's
growth in the first half was sluggish. Revenue rose 2.4% from a year
earlier, while Finnish rival Nokia Oy reported a 36% increase in
first-half revenue. (Alcatel, like many French companies, reports
earnings only annually.) Cables and components, a catch-all Alcatel
division, last year reported revenue that was more than half as large as
the company's key telecommunications activity. Alcatel still makes parts
for antilock-braking systems and batteries for aircraft. And Alcatel
still has roughly 500 subsidiaries.
Even Tchuruk himself seems uncertain whether to talk the talk of bold
change that foreign investors like to hear, or the reassuring patter of
"sticking to the calendar" and "meeting forecasts" that plays better
domestically. Tchuruk defends the idea that Alcatel is focusing on
telecommunications but describes the company as a "trimaran" that gains
stability by retaining big stakes in Thomson's defense-electronics
business and Alstom's train and power activities. "We have gone very
fast, without disruptions in the company," he says.
Before this summer's transfer of staff to the Alstom spinoff, Tchuruk
had shaved the work force only about 1%, to 189,500 at the end of 1997,
from 191,800 when he arrived in 1995.
Contrast Alcatel with AT&T Corp., which spun off Lucent Technologies
Inc. two years ago, has laid off tens of thousands of workers, and is
reshaping its core business through plans to buy cable-TV giant
Tele-Communications Inc. Lucent has emerged as the focused high-tech
company Alcatel talks about becoming.
The DSC acquisition has done little to fix the two glaring holes in
Alcatel's lineup-mobile-phone and Internet products. Alcatel relies on
Cisco Systems Inc. of the U.S. to provide it with key Internet
technology, even though Jozef Cornu, Alcatel's chief operating officer,
admits that developing such technology in-house is a priority.
Alcatel has avoided dramatic change despite the fact that its
past-selling trains, phone switches and turbines to public rail, phone
and power monopoliesleaves it poorly adapted to compete globally.
"There's a strong culture and a history of working in monopoly markets,"
said Francois Kornmann, an analyst at French consulting firm Idate.
Alcatel is still a marginal cellular equipment supplier, supplying
only about 5.5% of the handsets in Europe, according to market-research
firm Dataquest. And Alcatel's first-half cellular-equipment sales fell
from a year earlier, according to Global Mobile, an industry newsletter.
Tchuruk, however, is happy with his company. "The advantage of a big
firm is its power, its diverse technical abilities and its immense
markets. The disadvantage is a relatively slow reaction time," he said.
"What we've created is a small structure that can surf on the surface of
Alcatel in a completely selfish way, while taking advantage of its
size."
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