Online Extra: Vivendi Has Conquered. Can It Rule?

It has grown by acquisiton to become the world's No. 2 media player. Now, the challenge is to manage it well

Not since Napoleon has France produced an empire-builder as ambitious as Jean-Marie Messier. In five years of voracious dealmaking, the 44-year-old dynamo has transformed a financially ailing French utility into Vivendi Universal, the world's No. 2 media company behind AOL Time Warner. Last year, Messier acquired Seagram Co., adding Universal Studios and Universal Music Group to his portfolio.

Since then he has scooped up a bevy of online music and game businesses. And on June 1 he sealed a $1.7 billion acquisition of U.S. education publisher Houghton Mifflin. "Worldwide, we want to be in the top three of any content business we are in," Messier says. "If we aren't in the top three, we won't stay."

It has all happened at such dizzying speed that you'd think Vivendi Universal investors would lose their nerve. Some have. The company's shares are down 15% so far this year, to $63. But that performance closely tracks most major media stocks. And many analysts believe that Vivendi Universal is still undervalued by at least 20%. For the first quarter, it topped expectations, with revenues up 10%, to $5.2 billion. Even with economic storm clouds over the U.S. and Europe, it's expected to boost operating earnings a healthy 35% this year. COMFY CASH CUSHION. Messier looks set to keep the good news coming for a while. By the end of next year, he expects to have realized $400 million in efficiences from the Seagram merger. He hopes to achieve the savings partly with cross-marketing -- for example, putting Universal film characters into video games made by Vivendi Universal's publishing unit.

The company is also streamlining operations -- for example, creating a single unit to manage its thematic television channels on both sides of the Atlantic. Messier is cracking the whip on costs at Vivendi Universal unit Canal +, the No. 1 European pay-TV company, which is expected to be back in the black next year after several years of losses. Some of Messier's recent acquisitions, such as online music service and online game site, are expected to break even by the end of this year.

Perhaps most important, Vivendi Universal has a comfy cushion of cash flow. Scratch the surface of this would-be New Economy giant, and you'll find a lot of old-style holdings -- everything from movies, music, and book publishing to a separately listed utilities division, Vivendi Environment, which generated half of Vivendi Universal's $50 billion in revenues last year. Houghton Mifflin adds to the cushion, with steady cash flow, if unspectacular margins, from its $1 billion in annual sales.

DELIVERY TIME. What's more, compared with other media companies Vivendi Universal is relatively insulated from the current economic downturn because most of its media revenues are subscription-driven. It gets less than 5% of revenues from advertising.

Even so, with Vivendi Universal now trading at a hefty 30 times earnings, not far behind AOL Time Warner, Messier is going to have to demonstrate soon that he can deliver the online bounty he promised at the time of the Seagram acquisition. His plan is to make the company a Web-centric powerhouse that will deliver a vast array of digital content to consumers over cell phones and interactive TV. Vivendi Universal already has the content. The problem is distribution. Vizzavi, its planned mobile Internet portal, has been repeatedly delayed because next-generation cell-phone handsets aren't yet available. And the launch of new interactive-TV technology, permitting video downloads on demand, has been delayed at least until next year.

Vivendi is also in a race against other music industry leaders to offer a subscription-based online music service, replacing renegade players such as Napster. Earlier this year, Messier inked a deal with Sony to jointly develop such a service, called Duet. It will launch this summer. He plans to use's file-sharing technology for Duet, while maintaining's site separately to take advantage of its well-known brand. But he'll be up against stiff competition from Warner Music, EMI, and Bertelsmann, which are jointly launching their own subscription-based music service this summer.

TALL ORDER. Likewise, Messier has set ambitious plans for spiffing up Vivendi Unviersal's publishing business. In his view, education and entertainment can profitably be "bundled" -- by, for example, supplementing traditional textbooks with interactive games for children, either on CD-ROM or online.

Add it all up, and Messier has given himself a tall order. He has clearly proven his skills as a dealmaker. Now, he has to prove himself all over again -- as a manager who can turn visions into reality.

By Carol Matlack in Paris

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