Silicon D Day

To survive in the Internet era, Europe's tech titans are learning to do business Valley-style. Hello, stock options

On a mild fall day in Paris two years ago, Alcatel Chairman Serge Tchuruk received a shrill wake-up call from Silicon Valley. Tchuruk had been busy selling money-losing divisions of the giant phone-gear manufacturer and carving out layers of bureaucracy--turning Alcatel around the old-fashioned way. But in its 102-year history, Alcatel had never faced a New World phenomenon like Cisco Systems Inc. The Silicon Valley hotshot had been racing around the Continent, gobbling up contracts at Alcatel's expense--and was so successful that on that September afternoon, Tchuruk had to issue a warning that earnings would not meet expectations. Investors, led by American fund managers, responded with a vengeance, driving Alcatel shares down by 38%.

That hurt. But it also helped shake things up at Alcatel. After the plunge, Tchuruk kickstarted an effort to remodel Alcatel after the Silicon Valley rivals that were stealing its business. Over the next 18 months, he went on a high-tech buying spree, gobbling up a half-dozen North American companies for $11.3 billion. He shifted entire divisions across the Atlantic, and named the American head of his U.S. unit,

Krish Prabhu, president and heir to Alcatel's top job. He even instituted stock options, long taboo in egalitarian France. Now, looking out his window at the grey rooftops of Paris, Tchuruk muses: "We're not a really French company anymore."

Parting with power. Maybe not, but Alcatel is smack-dab in Europe's mainstream these days. Across the Continent, titans of the tech establishment--companies such as electronics giants Philips Electronics, Siemens, and Ericsson and software powerhouse SAP--are scrambling to survive in the Internet Age. Their first move is often a shopping spree in Silicon Valley and other tech havens in America--investments that are being made in spite of the weak euro.

Bouts of spending are only the start in this European transformation. For their new American acquisitions to take root--and for the brain trust they're paying for to stay put--the Europeans must hew to Silicon Valley ways. This means a lot more than ditching the dress code, installing hot tubs, or forking over mouthwatering options. It means parting with power.

Why? It boils down to a question of who needs whom. Even with failed dot-coms littering the landscape from San Jose to San Mateo, the Valley remains the world's hottest job market, one where tech stars measure tenure in months, not years. So the European companies find themselves with new, more demanding employees--many of whom emerge from acquisitions holding big chunks of the purchaser's stock, plus more in options. They're owners, and precious few of them want to take orders from some suit nine time zones away at headquarters in Munich, Paris, or Amsterdam. To keep these employees happy and on board, European executives are giving them control over big pieces of the business, often including the most important: the Internet.

Through this grip on the Net, Silicon Valley is asserting its cultural dominion over the Old World. European companies large and small are becoming twin-headed beasts with headquarters on both sides of the Atlantic. European tech execs are as likely to bump into each other in San Jose as in St. Moritz or St. Tropez. "The Germans don't know French companies exist until they find us in Silicon Valley," says Pierre Haren, CEO of ILOG, a French software company. And these Europeans--German, French, and Dutch alike--bring the same Valley secrets back home. It's the emphasis on speed and a relentless focus on the markets that's remaking the Continent. "The two worlds are coming together," says Gerald Brady, a partner at London-based venture capital firm 3i. He should know: He just moved to 3i's Silicon Valley office.

The effect is dramatic. Far more than long-time bugaboos such as McDonald's Corp. and Hollywood, it's now Silicon Valley that's reshaping how Europeans live and work. America's Internet economy is hastening the spread of English as Europe's language. It's stretching the workweek--through laptops and cell phones--to every waking hour and then some. And it's giving birth to a broad equity culture in a region where stocks were long synonymous with inherited privilege and whispered tips.

This process is producing a new information elite. But it could also polarize Europe's economy and leave behind anyone who isn't Net-savvy or doesn't speak English. And this emerging digital divide, potentially far wider than America's, could rattle the foundations of the Continent's welfare states. In France, for example, politicos, unions, and high-tech execs are at loggerheads over a government-mandated 35-hour workweek--a laughable concept for any company working in the Net economy. And in Finland, rich Nokia Corp. stock options are creating a digital aristocracy--and generating wide resentment.

For now, though, most of the convulsions are occurring within Europe's largest companies, where the transition is often humbling and fraught with failure. From Foster City to the hills above Palo Alto, SAP has been a Valley fixture for a decade. Recently, though, strategy battles between the California branch and German headquarters have hobbled SAP's e-commerce push. Philips briefly entrusted power to its California chief until he started remaking the company around the Internet and set off a distracting battle. And managers at German chipmaker Infineon Technologies, a spin-off from Siemens, are pushing to replace old hierarchies with a looser California approach. Yet they face resistance from workers who measure status by age-old standards of desk sizes and company cars. Changing their thinking, says CEO Ulrich Schumacher, "is a painful process."

Europeans, naturally, aren't alone in facing these digital dilemmas. American corporations from Lucent Technologies Inc. to Valley legend Hewlett-Packard Co. also are struggling to catch up with faster upstarts such as Cisco and Dell Computer Corp. But Europe's companies face a tougher transition. They're adapting to a foreign-born revolution, one that often appears, to the Europeans' dismay, to reward speed and marketing over quality. What's more, many of Europe's proudest tech outfits are a century or more old--very old dogs to be learning new Net tricks.

Street of dreams. This rise of Valley culture in Europe paves the way for generational change. Until lately, craggy behemoths such as Alcatel, Philips, and Deutsche Telekom sat atop Europe's tech economy. Only the most tenacious of the young could get a startup funded. America's Net culture, by contrast, has thrived by feeding money and opportunity to young people with ideas. Europe's greatest challenge, says Nicholas Negroponte, director of Massachusetts Institute of Technology's Media Lab, "is to learn to listen to its young." Silicon Valley's emerging influence will help accomplish just that.

Already, venture-capital funds and high-tech incubators are popping up from Helsinki to Milan, while U.S. venture capitalists such as Benchmark Capital are establishing beachheads in Europe. This year, even as dot-coms swoon, some $11.5 billion should pour into European startups--twice last year's amount, says industry monitoring group Tornado-Insider. Boosting the Valley's influence even further, many European investors have branches in California and are inspired by the legends of venture capital's street of dreams, Sand Hill Road. "Lots of people who couldn't find the right opportunities here in the last decade went to Silicon Valley," says James O. Carter, American CEO of Milan-based HiuGO, a mobile-Internet portal funded by Italian Net incubator Cirlab. Now, he says, they're coming back with Valley money, connections, and knowhow.

Increasingly, Europe's young are taking American-style career detours. Until a few years ago, engineering graduates from Sweden's Royal Institute of Technology filed so obediently into posts at Ericsson that it was called "the fifth year." Now, many are dropping out and landing venture funding for mobile Web startups. "Nobody's waiting for jobs at Ericsson anymore," says Erik Bohman, 28-year-old co-founder of Stockholm Net startup E-hand. "People from Ericsson are now working for us."

To keep a grip on their employees, Ericsson and the other giants must shift to the Valley's Chardonnay-and-options culture. It's not as easy as it might sound. In March, 1999, Alcatel triumphantly announced a $2 billion buyout of Xylan Corp., a Southern California manufacturer of Internet routers. This was Alcatel's major step to fight for its piece of the fast-growing data-networking market, one dominated by North Americans Cisco, Lucent, and Nortel Networks. The French execs neglected to prep Xylan employees, who were dismayed to learn that an Internet also-ran with a then-tumbling stock was taking over. Within hours, Xylan engineers had their resumes online. Scores left in the following days, and Alcatel spent months repairing the damage. "We learned a lesson from that," says Patrick Liot, head of Alcatel's Silicon Valley-based Internet division. Since then, Alcatel has followed Cisco's example, offering employees at acquired companies gobs of autonomy and stock options from the moment of the announcement.

Options aren't worth much, though, if the new employees think the stock's a loser. That's one reason European companies are recalibrating marketing to Valley norms. That means building a brand not only for customers but also for Wall Street. A high-flying stock, after all, isn't just takeover currency. It's bait to woo top engineers--and the glue to keep them in place.

To date, most European companies have steered clear of marketing hype and have rarely challenged their rivals in public. That's changing. At Alcatel, execs from acquired companies such as Canada's Newbridge Networks are pushing for in-your-face ads that trumpet the company's three-to-one market lead over archrival Cisco in high-speed data modems. "We annihilate the competition, and we're almost afraid to tell people about it," says Pearse Flynn, the former president of Newbridge who now heads Alcatel's Carrier Networking Group. "I would ram it down Cisco's throat."

Collision course. One European executive who has taken bold American marketing to heart is Vivendi CEO Jean-Marie Messier. Just three years ago, Vivendi was a century-old utility called Compagnie Generale des Eaux. Messier knew the traditional European power base--fellow members of the elite banks, city halls, and ministries--counts for little any more. To make up the difference, he wanted a full battery of California weapons: a hot stock, a big brand, Net smarts, and speed. Messier changed the company's name to Vivendi, got it listed in New York--its symbol an easily remembered "V"--and reoriented it toward mobile phones, TV, and the Net. Then, in June, Messier crowned his New Economy metamorphosis with a $43 billion buyout of Seagram Co., including Universal Studios. If the deal passes regulatory muster it puts Vivendi on a collision course with U.S. powers such as America Online Inc.

Europe's phone giants are reaching for the some of the same magic. From Deutsche Telekom to Portugal Telecom, most already rule the Internet in their home markets. But to build those businesses and retain top talent, they also need to adapt to Valley ways. The leader in this shift is Spain's Telefonica, which last year spun off its Internet service provider, Terra Networks, in Madrid and on the Nasdaq. Last May, Terra used its pricey stock to buy American portal Lycos Inc. for $12.5 billion. Now, as Telefonica pursues the Internet and the mobile Web, the company runs on two tracks: It frantically hires New-Economy workers while nudging seasoned hands from its days as a utility toward early retirement.

In these European transformations, troubles often surface as the New World outgrowths push for power. That happened at Philips, the venerable Dutch electronics giant. CEO Cor Boonstra wanted to turn all Philips products, from TVs to cell phones, into Net machines, requiring inroads into America's computer industry. Three years ago, Boonstra found the man to lead this charge. Roel Pieper, a Dutchman, boasted a long Valley resume. He was a Unix pioneer and later, as CEO of Tandem Computers Inc., made millions when it was sold to Compaq Computer Corp. He seemed to know everybody in the Valley and had even once bought a boat from Netscape Communications founder Jim Clark.

This was a foreign world to Boonstra. But he knew Philips badly needed a big Internet push, so he hired Pieper as executive vice-president. Pieper dove into the job and quickly set his sights on a megadeal. The target was General Instruments, the leading maker of set-top boxes. The price was likely to exceed $5 billion, but the brand and technology could push Philips decisively into the next generation of the Net.

Back at Amsterdam headquarters, Pieper's maneuvers didn't sit well. CEO succession was coming up within two years, and Pieper seemed to be positioning himself for the job. He had plenty of rivals. Rumors soon circulated that he was spending money lavishly--both the company's and his own--and turning his back on Philips' thrifty, understated culture.

But the real conflict centered on the General Instruments deal. It was pricey, of course. That spooked some board members, say sources close to the company. Perhaps more important was control, an issue that often arises as Net operations grow. The General Instruments buy looked likely to strengthen Pieper's grip on Philips, putting perhaps the most crucial and dynamic branch of the company under Silicon Valley command. The board nixed the deal in early 1999, and Pieper quit. "I wanted to save the TV for Philips, and they weren't interested," he says. Months later, Motorola Inc. bought General Instruments for a staggering $17 billion. Guenther Dengel, executive vice-president of Philips Semiconductors, says wistfully: "For the set-top business, [General Instruments] would have been a boost."

Bushwacked. Fortunately for Philips, its major Japanese and Korean rivals also are groping for a Net foothold. Software maker SAP should be so lucky. The German company grew into a $5 billion superstar through the 1990s, selling vast software programs to run operations in the world's biggest corporations. Its research-and-development budget towered over the competition's, including database king Oracle Corp. And its customer list was unparalleled. But as the Internet economy developed, SAP pursued an old-fashioned strategy based on R&D, meticulous engineering, and blue-chip customers--and got bushwacked by Oracle and a constellation of smaller Valley stars.

Howard Lau saw the Net wave rising. The Stanford University grad ran SAP's venture arm and poured investments into a passel of promising software companies. Over the next two years, while SAP painstakingly pieced together its response to e-commerce, California companies raced ahead following the Valley formula: They often marketed software they didn't yet have in hand and then dangled rich options in front of engineers who worked night and day to develop it.

Paradoxically, SAP got rich from some of the same companies that were whipping it. In Lau's first two years heading SAP Ventures, his investments appreciated, he says, more than tenfold. It was small consolation. Last spring, SAP finally moved to establish its own fleet-footed e-commerce business, SAP Markets, in Silicon Valley, free from German control. Yet when the startup failed to win contracts for the big industrial electronic marketplaces, the German company swallowed its pride and forged a joint venture to piggyback on one of the startups it had funded, Commerce One Inc. With that, the Valley's sway over Europe's biggest software company grew larger.

Chalk up one more for the Valley. Despite these triumphs, scratch a European and you'll hear about the flaws and liabilities of the Silicon Valley model, especially the tendency to promote products before they are finished. "Americans develop with marketing slides and then figure out how to create it," gripes SAP marketing chief Guenther Tolkmit. Europeans also complain that Americans skimp on details--and take all-too-frequent breaks to gawk at the stock price. Joelle Gautier, a French marketing vice-president for Alcatel at the former Xylan, says Americans work at warp speed, but are often sloppy. "They work fast, like firefighters," she says.

Grumbling aside, Europeans are picking up the same urgency. It's too soon to tell whether the cultural transformation will pay off for the likes of Alcatel, Vivendi, and SAP. But their attempts, successful or not, are changing Europe. Forget siestas and three-hour lunches. As the Valley rhythm picks up, the Old Continent is suddenly feeling a whole lot younger. online

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