Commentary: Paris Should Stop Dictating DealsGail Edmondson
State intervention in business is rapidly falling out of favor in Europe, with good reason. Governments' big push to forge state-controlled industrial giants failed miserably. Many "national champions" alive today, such as French computer maker Groupe Bull, survive only because of massive taxpayer-funded bailouts. Now most countries are allowing market forces to mold more competitive companies.
But France is bucking the trend. Although the government of President Jacques Chirac is making progress cutting its huge deficit, it is still resorting to dirigiste solutions in restructuring the country's ailing defense industry. In their plans to sell Thomson, a huge state-owned company, and arrange a merger for another state company, Aerospatiale, the government wants to dictate the deals instead of taking the best bids the market has to offer. The results could be disastrous, since the fate of Thomson and Aerospatiale will have a direct impact on the future of Europe's entire defense sector.
In Thomson's case, Chirac's government wants to avoid the public embarrassment of a state bailout, like those that have rescued Credit Lyonnais, Groupe Bull, Air France, and others. Although the defense electronics business of Thomson-CSF is cash-rich and profitable, Thomson Multimedia has generated more than $4 billion in debt. Despite innovations in digital satellites and set-top boxes, Thomson Multimedia is also losing $200 million a year as a result of heavy interest payments and razor-thin margins in televisions. No one will buy Thomson Multimedia unless the state assumes the debt. That's a political impossibility when Chirac wants to convince taxpayers and investors that France will cut its deficit. So the government wants to sell the two Thomson divisions together.
Yet the ideal suitor for Thomson-CSF doesn't want the multimedia business. Lagardere Groupe wants a marriage between its Matra defense business and Thomson-CSF, which would create a $12 billion company. Noel Forgeard, chief executive of Lagardere Groupe's Matra Defense Espace, is working on an alliance with German and British contractors to bid for Thomson-CSF. "It's a watershed that a company like Thomson is up for sale," says Digby Waller, senior economist at the Institute for Strategic Studies in London. "It could set in motion a number of deals."
Those deals may never happen. Government sources say the favored candidate to buy all of Thomson is telecom giant Alcatel Alsthom, a company that lost $5 billion in 1995. Alcatel's offer may avert a scandal over Thomson Multimedia's dire condition, but it may also impair its own recovery. Industry experts say that Chief Executive Serge Tchuruk would eventually sell off big chunks of Thomson.
It's still a risky bet. While Tchuruk wants Thomson's digital satellite systems and digital set-top boxes, he could spoil Alcatel's recovery by taking on a mountain of debt as well as a low-margin television unit. And it's unlikely Alcatel could throw its strength into building a world-class defense business. Some French officials might like to believe that Alcatel will emerge as a leader in chips, consumer electronics, telecom, and defense. But no global company has successfully managed to dominate all four businesses. "There is a risk the government could screw up big opportunities," says Nigel Deighton, European research director for market researcher Gartner Group.
Lagardere proposes a simpler solution. It is willing to find a buyer that would jointly bid for Thomson's nondefense businesses. Korea's Daewoo Group and Samsung Group have expressed interest in this idea. But government officials so far refuse to sell off France's consumer-electronics giant to an Asian competitor.
PRESSURE. The government's interventions don't end there. Prime Minister Alain Juppe's advisers have already nixed an alliance between money-losing state-owned missile maker Aerospatiale and Thomson-CSF. The plan is to rearrange France's defense industry into two separate sectors, aerospace and defense electronics. To that end, Juppe and Chirac are pressuring the profitable, privately owned Dassault Aviation to merge with Aerospatiale. Industry insiders say the government has threatened to nationalize Dassault unless its fiercely independent chief, Serge Dassault, presents a merger proposal by June.
Nationalizing a company that opposes a state-mandated merger puts France's industrial politics on par with those of developing countries. And coaxing an unnatural marriage between Alcatel and Thomson is a recipe for disaster. It is time French leaders tried something really radical--letting companies and shareholders determine their own destinies. The result could be some true national champions that can compete globally in the next century.