Burned by the Market, Alcatel Vows Openness
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By Barry James International Herald Tribune
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BRUSSELS - After suffering one of the biggest backlashes in the history of the French stock exchange, the telecommunications giant Alcatel SA claims that it has learned its lesson and is on the way back.
From now on, says Krish Prabhu, senior executive vice president, ''we are clear, we are transparent.''
But analysts say it will take a long time for the market to forgive Alcatel, the world's fourth-largest telecommunications group, not so much because of its economic performance but because it handed investors a nasty surprise without any preparation. For many of the large American institutional investors, the fall of Alcatel was symptomatic of the clubby way many of them perceive French companies as doing business, with company information leaked through newspaper interviews and scant transparency otherwise.
Alcatel used to be a sprawling state-owned conglomerate, whose interests ran from magazines and vineyards to heavy engineering. Under the leadership of its current chief executive, Serge Tchuruk, a former oil industry executive, it has been transformed into a specific telecommunications company, bent on becoming a leader in the exploding market for data communications as well as in its traditional sphere of voice telephony.
Alcatel expects much of its growth to come from the United States, already its biggest single market with 20 percent of sales, and Mr. Prabhu said this means it will have to behave like an American company, with more open reporting standards.
But its reputation in the United States has been damaged by a slew of class-action lawsuits from disgruntled American investors because of a plunge in the company's share price that sliced 38 percent, or about 70 billion French francs ($12.39 billion), from Alcatel's book value. The shares fell to 571 francs from 927 francs on Sept. 17 after the company said profit for 1998 would not meet expectations. The shares have since regained some of that ground, and closed unchanged on Friday, at 592 francs.
Former shareholders of DSC Communications Corp., which Alcatel acquired in a $3.3 billion stock swap Sept. 4, accuse the French company of securities fraud because it failed to disclose that it would not meet profit expectations for 1998. The plaintiffs allege that Alcatel gave ''false and misleading statements'' and concealed information that could have led to the canceling or renegotiation of the sale.
Alcatel and Mr. Tchuruk strenuously deny the allegations that they concealed material information, although they decline to comment on the specific cases before U.S. courts. Mr. Tchuruk has said he did not learn about disappointing numbers until Sept. 8, after the DSC agreement was concluded. ''I told what I knew as soon as I knew it,'' he told the financial newspaper Les Echos, although he acknowledged that he had been informed a little late.
Mr. Prabhu, who heads Alcatel's U.S. operations, said the stock slump was caused by ''certain unforeseen things,'' some of which, like the Russian economic collapse, were ''out of our control.'' It was also, he said, an extremely volatile time on global markets, and he suggested that investors had overreacted.
''Our operations managers did not have the insight to forecast or anticipate or raise a warning,'' he said. ''In the future, managers will watch external factors more closely.''
Neil Barton, an analyst for Merrill Lynch Global Securities, predicted it would take a year or more before Alcatel's reputation recovers.
Mr. Tchuruk inherited a company with $4.2 billion in losses in 1995, and turned it around by refocusing its energies and shutting down about 60 plants with the loss of 30,000 jobs. He became a darling of investors, but, analysts said, raised expectations too high. Had it not been for excessive hopes and had it not just concluded the DSC deal, the analysts said, Alcatel's problems might have been written off as a casualty of the global economic turndown: What caused the share collapse was not just the figures but a fundamental loss of confidence in the direction the company was heading.
Alcatel reported a tenfold increase in profit for the first half of 1998, to 15.2 billion francs, but this result was inflated by the sale of the company's share in GEC-Alsthom, a manufacturer of trains and heavy equipment. Income from operations increased to 2.3 billion francs in the first half of 1998 from 2 billion francs in the corresponding period in 1997, and total sales for the same period increased 2.5 percent, to 61.6 billion francs, the company said.
What sent investor confidence plunging Sept. 17 was Mr. Tchuruk's admission of a dramatic slowdown in sales, not only in emerging markets but to the company's traditional customers in Europe, where orders had shrunk by as much as 37 percent.
''It was not the result that had been expected,'' Mr. Prabhu acknowledged.
In the future, Alcatel said it would issue quarterly reports on earnings and prospects - a recognition that damage could have been limited had it taken the trouble to properly inform the U.S. institutional investors who held an estimated 50 percent of its stock.
The company this week announced a major reshuffling of management and introduced procedures to improve internal reporting. In the past, the corporate structure was based on semiautonomous satrapies dealing with monopoly public operators. With the deregulation of European telecommunications markets, the company was reorganized around 10 profit centers. The latest reorganization, a spokesman said, is aimed at improving coordination between profit and geographical centers.
The telecommunications unit now will focus on three core markets: public networks, the information highway, and the business and general public sector.
Mr. Prabhu said that with the reorganization completed, the company is now well positioned to cope with the explosive growth of communications engendered by the Internet. Telecommunications and electronics now account for two thirds of its activities, and other sectors, such as cables and components, are closely related to the core business. As part of the management shake-up this week, Mr. Prabhu, an American, was put in charge of the telecommunications sector and appointed to the executive committee.
In moving into the American market, Alcatel faces heavy competition from powerful rivals such as Lucent Technologies Inc., Cisco Systems Inc. and Nortel Telecom Ltd.
However, Mr. Prabhu said the acquisition of DSC had given the company a ''critical mass'' in the United States, where it would concentrate on building ''Internet-friendly'' products and systems, such as a Web-surfing screen phone now being tested in Europe.
It has also developed superfast cable connections that could within months replace modems in personal computers.
Mr. Prabhu said Alcatel was working on networking solutions that would allow public operators and corporations to handle the ever larger data flows created by the Internet.
The company is concentrating on increasing capacity on existing systems - by as much as 100 percent on local area networks - and on bridging the differences between mobile and fixed phone networks and on providing seamless voice-and-data systems.
The company also is developing ''intelligent networking'' solutions that would, for example, enable secure credit card transactions on the Internet.
Mr. Prabhu said Alcatel was able to bring a global perspective to a market dominated by industry giants like Lucent.
''They still get their business from the United States and the bulk of that from AT&T,'' he said.
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