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Monday, July 01, 2002

I have been expressing my doubts that the re-election of Jacques Chirac in France, or the growing drift to the right in European politics generally, was a signal that reform was on the agenda. One of my doubts centres around what I perceive to be the rather mediocre and inept business culture of far too many European companies when faced with the diverseand challenging possibilities presented by the new technologies associated with the information age. The latest bout of news from France only serves to confirm my suspicions:

The US is not the only place where previously fast-growing communications companies have been humbled this week. Vivendi Universal and France Telecom, two companies that used to embody France's global ambitions. In stock market terms, both companies are shadows of their bull-market selves.

In March 2000, when the telecoms and media bubble peaked, France Telecom was France's largest company. Worth €208bn, it was just over twice the size of its nearest rival, TotalFinaElf. Vivendi Universal was the third largest, its shares valued at €83bn.Today, France Telecom's €11bn market value is a tenth of the oil group's. The 95 per cent fall in its share price has left it in 25th position in the CAC-40 index of leading French shares.

Vivendi Universal shares have meanwhile fallen 74 per cent from their peak. More than €250bn of paper wealth has evaporated from the two companies, and both are facing crises of investor confidence. The mess at France Telecom could even embroil President Jacques Chirac's newly elected government.

"In America, the biggest financial disasters tend to be the result of individual greed leading to corruption - but in France they come about when you give very clever and ambitious technocrats the means to implement a vision," says one Paris banker. "It happened with Haberer at Crédit Lyonnais and it looks [as if] it could happen with Messier and Bon. Their eyes were too big for their stomachs.
Source: Financial Times "LINK

Today the story continues with news that the new French government may be actually considering renationalising France Telecom, while the Vivendi board are in the process of showing Messier the door.

The French government is prepared to contemplate renationalising France Telecom if market sentiment towards the national operator does not improve, according to government sources this weekend.

The sources said such a move, although politically controversial, could be a "defensible" solution to the heavily-indebted company's crisis of confidence with the capital markets and would be preferable to a huge rights issue at the current deflated share price......The market value of the minority 44 per cent not owned by the state is about E4.5bn. This is less than the E8bn it might have to contribute to the E14bn-15bn rights issue that analysts say France Telecom needs to meet its debt reduction targets and avoid downgrades of its debt to junk status.
Source: Financial Times LINK

French media boss Jean-Marie Messier has agreed to resign after a dramatic boardroom mutiny over his embattled leadership of Vivendi Universal, an industry source said on Monday. Shares in the world's second largest media firm soared almost 20 percent as investors celebrated what looked like the last chapter of a two-year, debt-fueled adventure that propelled a gray French water firm to a big player in Hollywood. Messier, 45, has been blamed for Vivendi's recent woes after transforming the 150-year-old former water company into a global media titan with control of Universal Studios and a music label boasting a galaxy of stars from Sting to Eminem and U2. After a manic acquisition spree, Messier left Vivendi struggling with a huge debt pile, a sliding share price and France's biggest loss in corporate history.Vivendi shares, which have fallen more than 60 percent so far this year, were 10.8 percent up at 24.24 euros at 1205 GMT on the Paris exchange. The rise added to strong gains last Friday as the markets buzzed with talk of unusually large share purchases with 10 percent of the stock traded in five days.

That sparked fears in France that Vivendi could be broken up or fall into American hands, forcing Messier loyalists on the board to act quickly to hold the Franco-American group together. Even without Messier, Vivendi will have to decide what to do about its 19 billion euros of debt and heal the board divisions which have shattered his dream of forging a Franco-American giant despite vast differences in business culture.
Source:Yahoo News LINK

So while the France Telecom story really only focuses on the capacity of a small group of people to loose a lot of other peoples money on badly thought out adventures in order ultimately to be bailed out by the benevolent state, the Vivendi one has more, because it's being played out over the backdrop of a gamble by some European enterprises to obtain what is known as global reach. The evidence seems to be mounting that this is a case of ambition without ability. The New York Times had the following revealing background story to the Vivendi affair:

The Bronfman family, overruled by the Vivendi Universal board last week in its call for the resignation of the chairman, Jean-Marie Messier, has its lawyers looking for a loophole that would allow it to try again to oust Mr. Messier, according to a person close to the discussions.The Bronfmans, who became the largest shareholders in Vivendi Universal and acquired three seats on the board by selling the Seagram Company and its Universal media properties for $34 billion in Vivendi stock in 2000, have seen their fortune dwindle with each downward tick of the company's shares. Vivendi's stock, which trades in Paris and as American depository receipts in New York, has fallen 60 percent in the United States so far this year.

Should the Bronfmans succeed in their campaign to force out Mr. Messier, Vivendi could be in for a radical reshaping, one that might ultimately see the French and American assets part company, analysts said. "The Bronfmans want to get back to a company like Seagram that was easier to understand, with assets that are more strategically interlinked and without balance sheet problems," said Michael Nathanson, an analyst with Sanford C. Bernstein & Company.
If the Bronfmans prevail and the French and American components of Vivendi ultimately split, what would the family be left with?

Universal Music is the world's largest recorded music company, but revenues for the industry are in decline and it is too early to gauge the prospects for online music. Universal Studios has been a star performer, but it is a risky business dependent on the vicissitudes of the box office. Then there is USA Networks, which is battling a television ratings slump, and an educational publishing unit whose main imprint is Houghton Mifflin, which has lagged behind the market leaders.

Mr. Nathanson points out that without the cash-rich Seagram drinks business to support the company's entertainment interests, the Bronfmans could be "in an even worse position than they were before" selling out to Vivendi.In that respect, Edgar Bronfman Jr. and Mr. Messier have something in common, analysts said. Both took unglamorous yet profitable businesses and pushed them into the media spotlight — with potentially disastrous results.

Apart from the fact that no-one, from AOL down to Terra Lycos and Bertelsman, has been able to see how to make all this work, we have the rather preoccupying spectacle of European corporate management being put to the test and found wanting time and time again.

With the conceivably possible exception of Chris Ghent and Vodaphone, where exactly is Europe's answer to the US culture of start-up and dynamic initiative? Instead what we seem to have here is a self-important business class that thinks it understands when it doesn't.

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