Score One For Market Logic
On Oct. 17, France took a bold step forward. In the hotly contested privatization of defense and electronics giant Thomson, President Jacques Chirac finally favored the bid of defense and publishing group Lagardere over its rival, telecom giant Alcatel Alsthom.
The decision was a triumph of market logic over political favoritism and the deepest impulses of French dirigisme. In saying "Oui" to Lagardere, long thought to be out of the running, Chirac may finally be ushering in sweeping changes to French industrial policy. For the past decade, while other European countries were forced to embrace open competition, France remained staunchly protectionist at heart. Even when companies were privatized, the government tended to play kingmaker, arranging new groupings lacking in market logic.
The government's initial support of the Alcatel bid looked like one more illogical choice. Alcatel lacks the defense expertise of Lagardere's Matra unit, but it would have created a national champion in telecom, defense, and television technology--the kind of lumbering behemoth so dear to French policymakers.
Instead, the surprise decision to sell debt-laden Thomson for a symbolic franc to Lagardere paves the way for a new era of market openness. Lagardere's takeover of defense subsidiary Thomson CSF makes sense in the global defense industry, where contractors are rushing to achieve critical mass. And by approving the involvement of Daewoo Electronics--assumed by many insiders to be the kiss of death for Lagardere's bid--Chirac's government signals an end to xenophobic industrial attitudes. The sale of television maker Thomson Multimedia to Daewoo is a step back from the old drive to support key industries, even when the companies involved needed billions in subsidies. "France has reached the stage where it sells publicly owned companies that are ailing," says Budget Minister Alain Lamassoure.
To be sure, the proponents of protectionism still loom large in France. And in typical fashion, the government will pour a final $2.2 billion of taxpayers' money into recapitalizing Thomson. But the Thomson sale still shows a willingness among some key policymakers to embrace new thinking. Despite Chirac's known preference for Alcatel, a skeptical group of parliament members responsible for defense policy spoke out in favor of Lagardere. And the press vigorously examined the sale, avidly printing leaks that undermined Alcatel's bid.
France stands to gain technology and investment by selling to Daewoo, which promises to invest $1 billion in state-of-the-art production facilities in France and create 5,000 new jobs--at a time when unemployment tops 12%. If Thomson's digital technology thrives under Daewoo's management, the French economy will be the winner. The Korean giant, which wants to be the top TV manufacturer, plans to improve Thomson's profitability through better sourcing of components, particularly in Asia, and through new factories in Europe.
REAL JEWEL. The decision is also good news for loser Alcatel, whose stock rose immediately on the announcement. Its dream of creating a global electronics empire could have sabotaged the turnaround in progress, following losses of $5 billion in 1995. "There were concerns that Alcatel was trying to enter a market where it didn't have as much expertise as Matra," says Laurant Truchi, a fund manager at GTI Finance. Now Alcatel can concentrate on telecom, where there are more than enough challenges.
But the real jewel for France is the Lagardere Group's new defense company, to be called Thomson-Matra. It will rank high in global markets behind Lockheed Martin Loral and wield enough weight to become the focal point of rationalizing the European defense industry. Analysts expect the marriage to set off a cascade of partnerships among European contractors that have until now managed to hold onto their independence. And Thomson-Matra, unlike the old Thomson CSF, will no longer be an appendage of the government but a company that has to make profits. "France will have to give up the old cozy relationships" between contractors and government, says Robbin F. Laird, a Washington defense industry consultant. "The old way of doing business is decimated by this deal."
Finally, winning Thomson is bound to stimulate change at Lagardere. Analysts already speculate that Lagardere will hold onto its defense company and sell off its publishing holdings. "I think it's a good thing for all the parties involved," said Philippe Schmitt, an analyst at ABN Amro Hoare Govett in Paris.
A cynic might point out that Chirac had no choice. After all, France can no longer afford to prop up beleaguered state-owned companies--and a foundering Alcatel would have been a huge political liability in the years to come. Nevertheless, it is a courageous about-face. And about time.