Alcatel S.A.

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Alcatel S.A.

54, rue La Boetie
75008 Paris
France
Telephone: (+33) 1 40-76-10-10
Fax: (+33) 140-76-14-00
Web site: http://www.alcatel.com

Public Company
Incorporated: 1898 as Compagnie Génélate d’Electricité
Employees: 116,000
Sales: EUR 23.02 billion (US$22.02 billion) (1999)
Stock Exchanges: Paris New York
Ticker Symbol: ALA
NAIC: 513322 Cellular and Other Wireless Telecommunications

France’s second largest company in terms of market capitalization (after France Telecom), Alcatel S.A., formerly known as Alcatel Alsthom Compagnie Générale d’Electricité, has trans-formed itself into a telecommunications solutions provider for the 21st century. Led by Serge Tchuruk, former head of French petroleum powerhouse TotalFina Elf, Alcatel has shed much of its traditional industrial base to make increasing inroads in the worldwide mobile and fixed telephony market, with a focus on ATM equipment and network integration, as well as a mobile telephone manufacturing operation that places it as the number three producer (behind Nokia and Ericsson) of mobile telephone handsets in Europe. Yet it is the North American telecommunications market—worth about 60 percent of the world’s market—that is receiving most of Alcatel’s attention, as the company rushes to build a position to enable it to compete head-to-head with U.S. industry giants Cisco and Lucent. Toward this end Alcatel took a huge step when it acquired Canada’s Newbridge Networks in a deal worth more than US$7 billion in early 2000. That purchase completed a two-year US$16 billion spending spree—begun with the US$4 billion purchase of DSC Communications in 1998—that has allowed Alcatel to build a manufacturer and service network capable of providing turnkey network and telecommunications systems. In addition to its fiber optics capacity, a segment in which the company holds worldwide leadership, Alcatel is also the North American leader in supplying DSL (digital subscriber line, for high-speed Internet access) equipment. In its five-year restructuring drive, Alcatel has trimmed some 30,000 jobs and spun off industrial and other holdings in order to become a telecommunications powerhouse with annual sales worth more than EUR 23 billion.

Late 19th-Century French Industrial Giant

Compagnie Générale d’Electricité (CGE) was created in 1898 through the combination of two electric generating companies and a light bulb manufacturer. The merger, engineered by Pierre Azaria, formed one of Europe’s pioneer electric power and manufacturing companies, with interests in electric utilities in France and abroad.

During the first half of the 20th century, CGE expanded its electrical equipment manufacturing through acquisitions. The most important of these were: Société Française des Cables Electriques Bertrand-Borel, merged in 1911; Atelier de Construction Electrique de Delle, acquired in 1912; and Cie Générale d’Electro-Ceramique, purchased in 1921. The growth led CGE into building and equipping electric power plants as well as manufacturing cable used for the distribution of electricity.

In the 1920s CGE entered into a joint venture with its primary French competitor, Thomson-Brandt (an electronics manufacturer later renamed Thomson). The creation of the new concern, a light bulb manufacturer called Cie des Lampes, was encouraged by the French government, which would involve itself in CGE’s affairs in varying degrees over the course of the 20th century.

During the 1930s CGE diversified through the acquisition of construction and civil engineering companies and added batteries to its line of electrical products. By World War II, CGE was a diversified manufacturer of electrical equipment, a primary supplier to utilities, and itself an important distributor of electricity. The French government nationalized CGE as part of its effort to coordinate resistance to the German attack. But when the country came under Nazi occupation in 1941, the business was taken over by the invaders and run by collaborators. Unfortunately, this made CGE’s factories regular targets of Allied bombs. After the war, all of France’s electric utilities were nationalized, but the remainder of CGE’s operations returned to private management. The company’s traumatic experience under government control led it to reduce its dependence on government contracts.

A Conglomerate in the 1950s

CGE played a key role in the postwar redevelopment of the French economy. The company diversified into home appliances, telephone equipment, and industrial electronics, and expanded its traditional businesses in the manufacture of electric utility equipment, especially cables. By the end of the 1950s, CGE was a conglomerate with over 200 subsidiaries and the bureaucratic inertia that came with such a far-flung enterprise.

A reorganization in the 1960s formed six primary business groups: power generation, engineering, telecommunications, cable and wire, raw materials, and other products. In 1966 the conglomerate acquired a large construction company, the Société Générale d’Entreprises. In the late 1960s the French government enforced a restructuring of the country’s entire electrical engineering industry. The government felt that the industry would run better if Thomson-Brandt’s large Alsthom subsidiary, which manufactured power generating equipment and constructed power plants, were transferred to CGE. CGE, in turn, was enjoined to shift its data processing and appliance businesses to Thompson.

The new arrangement seemed to work out well at first: France enjoyed a period of rapid growth during the 1970s. CGE expanded its telecommunications interests with the purchase of Alcatel, a French communications pioneer established in 1879. Alcatel had introduced high-speed, high-capacity digital switching exchanges in 1970. The new division was combined with CGE’s existing telecommunications group, CIT, to form CIT Alcatel. The conglomerate’s General Contracting group became one of Europe’s top construction companies with the acquisition of a controlling interest in Sainrapt et Brice. CGE merged its Alsthom group with Chantiers de l’Atlantique, a top shipbuilding company, to form Alsthom-Atlantique, in 1976.

During the 1980s CGE consolidated its manufacturing and service operations in two broad areas: communications and energy. Communications included: public network switching, transmission, business communications, and cable manufacture. Energy included power generation, transmission and distribution, railway transport, and battery manufacture. Over the course of the decade, several major acquisitions were made, and non-core businesses were divested.

After François Mitterand’s administration re-nationalized CGE in 1982, the company acquired the electrical equipment operations of Sprecher & Schub and the railroad business of Jeumont-Schneide. The 1983 transfer of Thomson’s telecommunications operations to CGE made the latter company the fifth largest telephone equipment manufacturer in the world.

When conservative Jacques Chirac was elected prime minister of France, the political pendulum swung away from nationalization. In 1986 CGE returned to private control with a US$1.9 billion initial public offering—one of the largest stock offers in French history. Pierre Suard became chairman and CEO. He sought to remake CGE as an international conglomerate run by a cosmopolitan management team. He eschewed France’s renowned cultural pride by making English the official working language at CGE’s Paris headquarters.

Suard was praised for his skill with acquisitions and divestments, which he began to apply as soon as the company was privatized. CGE increased its energy holdings with the purchase of a 40 percent stake in Framatome—a nuclear power company—and sold unsuccessful operations in markets including televisions and personal computers.

Transitioning to Telecommunications for the New Century

One analyst called the conglomerate’s 1986 purchase of a majority interest in the European telephone equipment operations of the United States’s ITT Corp. “the most important development in CGE’s modern history.” ITT’s operations were combined with CGE’s CIT Alcatel subsidiary to form Alcatel N.V., the world’s second largest telecommunications company. CGE owned 55.6 percent of the new multinational operation, which was registered in Holland with headquarters in Brussels. ITT held 37 percent of Alcatel, and the remainder was split between Belgium’s Société Générale and Credit Lyonnais, a French bank. Alcatel N.V. became the hub of CGE’s strategy as a privatized company. From 1980 to 1990 the group’s telecommunications business grew from US$9 billion annually to US$27.6 billion.

A 1987 acquisitions spree diversified CGE into pumping systems, batteries, nuclear boilers, and publishing. CGE also formed joint ventures with the United States’ Intermagnetics General Corp., Ferro Corp., and Exide Electronics during the year.

The 1989 merger of CGE’s Alsthom power and transportation subsidiary with the United Kingdom’s General Electric Company’s Powers System Division formed GEC Alsthom N.V., a 50/50 joint venture. CGE increased its ownership to 61.5 percent later that year through an internal consolidation of two major subsidiaries, Compagnie Financiere Alcatel and Alsthom. CGE also acquired 15 energy, transportation, and communications companies during that year alone.

Company Perspectives

Alcatel is: The leading architect of Internet communications solutions. Creating end-to-end networks that help people communicate smarter. At the center of the convergence revolution. Integrating communications onto a single broad-band nehvork. Making strong investments in people and technology. A company with unique international reach.

Suard was acclaimed for his ability to integrate these new divisions’ management, research, and manufacturing into the overall group scheme. He also emphasized research and development, spending about eight percent of total sales, or US$2.3 billion, in 1990 alone.

In the 1990s CGE focused on forging strategic alliances with foreign companies. It was hoped that the joint ventures would maximize the partners’ research and development efforts and give CGE entree to local markets. In 1990 the conglomerate formed a joint venture with Fiat S.p.A. that gave CGE control over the telephone transmission business of Fiat’s Telettra S.p.A. subsidiary. The two parent companies exchanged shares (Fiat received six percent of Alcatel and Alcatel secured three percent of Fiat), and Telettra was merged with Alcatel’s existing Italian operations. The new venture was 75 percent owned by Fiat and 25 percent owned by Alcatel N.V. This complex deal was carefully observed by the European Commission, which used its authority over cross-border business alliances to regulate transactions between the two companies.

From 1985 to 1990 alone, CGE’s sales doubled, from FFr 71.94 billion to FFr 143.90 billion. As the company grew, its net income on sales followed suit, increasing from 1.1 percent in 1985 to 2.9 percent in 1990.

During 1990 Suard decided to change CGE’s name, which was often mistaken in the global marketplace for the United States’ GE (General Electric Corp.) or the United Kingdom’s GEC (General Electric Co.). In fact, the French entity was prohibited from using its initials in some markets because of this type of confusion. Although not particularly well known in the United States, the Alcatel division had by this time over-taken AT&T as the world’s largest manufacturer of telecommunications equipment. The Alsthom name was well known in heavy electrical engineering, especially for the development of France’s Trains à Grande Vitesse. These two subsidiaries had also grown to become the primary businesses of CGE by 1990. As of January 1, 1991, CGE’s name was changed to Alcatel Alsthom Compagnie Générale d’Electricité, and the conglomerate was commonly known as Alcatel Alsthom.

Suard hoped to parlay the company’s more cosmopolitan name into an increased global presence: in 1991, 80 percent of Alcatel Alsthom’s business was still focused in Europe. Efforts were concentrated on Asia (especially China), the Pacific Rim, and Latin America. The People’s Republic of China represented a substantial opportunity for growth, because its 1.16 billion population needed the three services Alcatel Alsthom was prepared to provide: communications, energy, and transportation. Although the country’s limited infrastructure and politically inspired five-year plans held up progress, by 1991 GEC Alsthom was China’s primary provider of power, and Alcatel had a 40 percent share of the country’s public communications equipment market. By 1992, sales to China contributed five percent of Alcatel Alsthom’s total sales.

Alcatel also targeted the substantial U.S. telecommunication equipment market, which purchased 40 percent of the world’s telephone equipment. Alcatel acquired America’s number three supplier, Rockwell International Corporation’s telephone trans-mission equipment division, for US$625 million in 1991. When combined with the company’s existing Alcatel Network System subsidiary, the purchase brought Alcatel’s share of the U.S. market to 15 percent, a distant second to AT&T’s 58 percent stake. Alsthom also penetrated the U.S. market when it formed a consortium to build a TGV-type high-speed rail system linking the major cities of Texas in the early 1990s.

The new Alcatel 1000 telecommunication system, developed to provide high-speed data and image transmission and high-density television capability, as well as conventional telephone functions, was launched in 1991. Alcatel also became the first European company to test its cellular phone system that year.

Alcatel Alsthom purchased two more telecommunications and power cable manufacturers, Canada Cable & Wire Company and Germany’s AEG Kabel A.G., in 1991 and formed a “Space Alliance” with two European companies, Aerospatiale and Alenia, and the Loral Corporation of New York. The cooperative venture formed the world’s second largest supplier of satellite equipment.

Alcatel Alsthom slowed its acquisitions pace in 1992, but bought out ITT’s 30 percent stake in Alcatel N.V. for US$3.7 billion in cash and a seven percent share of Alcatel that spring. The transaction made ITT one of Alcatel’s primary shareholders.

Key Dates

1879:: Alcatel is founded.
1898:: Compagnie Générale d’Electricité (CGE) is created.
1911:: CGE acquires Société Française des Cables Electriques Bertrand-Borel.
1912:: CGE acquires Atelier de Construction Electrique de Delle.
1921:: Company acquires Cie Générale d’Electro-Ceramique.
1966:: Company acquires Société Générale d’Entreprises.
1970:: CGE acquires Alcatel, forms CIT Alcatel.
1976:: Company acquires Chantiers de l’Atlantique.
1982:: CGE is nationalized by French government.
1983:: Thomson’s telecommunications operations are transferred to CGE.
1986:: CGE is privatized; acquires ITT’s European tele-communications operations.
1989:: Company forms GEC Alsthom N.V joint venture with General Electric Company’s Powers System Division.
1991:: CGE changes name to Alcatel Alsthom Compagnie Générale d’Electricité; acquires Rockwell International Corporation’s telephone transmission equipment division.
1995:: Company launches major restructuring drive.
1998:: Company changes name to Alcatel S.A.; acquires DSC Communications, Assured Access Technology, Internet Devices, Packet Engines, and Xylan Corp.
2000:: Company acquires Newbridge Networks.

By the early 1990s, Alcatel Alsthom controlled 80 percent of France’s telephone transmission business. The company had also captured 20 percent of Germany’s telephone equipment market, second only to the venerable Siemens A.G. In 1993 Alcatel Alsthom commanded 23 percent of the worldwide market for telephone line transmission. Unlike other segments of the telephone equipment business, this highly profitable trade had grown on strong demand for high-capacity fiber-optic cables. Whereas other electronics companies were hard hit by the global recession of the early 1990s, Alcatel Alsthom suffered slower growth, rather than an actual decline. The company hoped to expand into the development of software for telecommunication switching and transmission in the 1990s.

Yet the company faced new tests as the century neared its end. In 1995, Suard was forced to resign after being indicted for fraud—including bribery allegations. Suard was later convicted and sentenced to three years in prison. In the meantime, a series of bad investments made by the company had come back to haunt it—and by the end of the year Alcatel Alsthom showed a loss of more than FFr 25 billion—the largest loss ever by a French company.

The company called in Serge Tchuruk, who, as head of Total (later TotalFina Elf), had mastered the turnaround of that ailing French giant. Tchuruk quickly set to work on a restructuring of Alcatel Alsthom, targeting particularly its telecommunications wing. Tchuruk’s timing was fortuitous, as the worldwide tele-communications sector was about to experience an explosion of activity. Yet, as Tchuruk explained to Institutional Investor : “I could tell you that I was a visionary and that in 1995 I suspected there would be a tremendous growth explosion in telecommunications. But if I were to say that, I’d be lying. Telecommunications was Alcatel’s biggest business but by far not the only one. And it was sick. It was really losing momentum. I realized if we did not correct the telecommunications problems, the whole company would drown. I decided perhaps 12 or 18 months later that the focus on telecommunications had to be exclusive, once we began to understand that the growth potential there would be just enormous.”

After trimming its payroll by 12,500 and selling off a number of its non-core assets, Alcatel Alsthom had returned to profits. But Tchuruk’s restructuring took on greater steam as the company, renamed simply Alcatel in 1998, transformed itself from a traditional industrial conglomerate into a focused high-technology company. Sales of the company’s assets, including its stakes in GEC Alsthom and its Cegelec engineering divisions, helped the company generate some US$12 billion in capital, used to fuel an ambitious US$16 billion acquisition drive designed to establish Alcatel as a major presence in the North American telecommunications market. The company’s acquisitions ranged from Texas-based DSC Communications, for US$4 billion, through the purchases of Assured Access Technology, Internet Devices, Packet Engines, and Xylan Corp, which were grouped together under the Xylan name with the 1998 acquisition of Packet Systems. In July 2000 came the culminating US$7 billion purchase of Newbridge Networks.

These acquisitions enabled Alcatel to take up a competitive position as it went head-to-head with industry giants Cisco Systems and Lucent Technologies on their home ground. The company’s low debt ratio and other sellable assets—including a 24 percent stake in French nuclear power leader Framatome and the company’s energy cables manufacturing division, expected to be spun off as a public company at the end of 2000—gave the company a war chest of more than EUR 10 billion for future acquisitions.

Principal Subsidiaries

Alcatel Space (51%); Alcatel STK ASA (Norway; 81%); Alcatel Telecom Norway A/S (81%); Alcatel USA Inc.; ALSTOM (24%); Compagnie Financière Alcatel; Cie Immobilière Méridionale; Civelec Electro Banque; Générale Occidentale; Genesys Telecommunications Laboratories, Inc.; Lacroix & Kress GmbH (Germany); Saft Groupe; Shanghai Bell Telephone Equipment Manufacturing Co. (China; 32%); SIKL; Société de Coulée Continue de Cuivre; Taiwan International Standard Electronic Ltd. (Taisel) (60%); Teletas (Turkey; 65%); Thomson-CSF (25%); Xylan Corporation.

Principal Competitors

3Com Corporation; Matsushita Communication; Ascom Holding; Motorola, Inc.; AT&T Broadband; NEC Corporation; Nokia Corporation; Cap Gemini; Nortel Networks Corporation; Cisco Systems, Inc.; Oki Electric; Cookson Group; Philips Electronics N.V.; Corning Incorporated; Pirelli S.p.A.; Ericsson; Qualcomm Inc.; Fujikura; Sagem; Harris Corporation; Samsung Electronics Co., Ltd.; Hitachi, Ltd.; SANYO Electric Co., Ltd.; Hughes Electronics Corporation; Siemens AG; Hyundai Group; Sony Corporation; Koor Industries Ltd.; Sumitomo Electric Industries; Lucent Technologies Inc.; Toshiba Corporation; Marconi plc.