Vivendi (A): Revitalizing A French Conglomerate

MAPPING THE BUSINESS LANDSCAPE

General Environment:

For CGE, the 1980s were a period of "unprecedented opportunity" in France in which it could make the "great leap forward". The French economy as a whole was growing rapidly and the hopes of an expanded market with the European Community were attractive opportunities for the firm.

In CGE, one form of diversification was "cross shareholdings". The origin of this cross-shareholdings can be traced to the period 1986-1988 during a time of "cohabitation" in French government between a social president, Francois Mitterand, and a more conservative Prime Minister, Jacques Chirac. Afraid of the inability of the French weak capital markets to absorb large quantity of shares domestically and hesitant to open ownership of France's "crown jewels" to foreigners, the French government encouraged large privately owned firms to soak up the new shares offered during the privatizations.

In 1995, the country's real GDP growth was 2.1%, sinking to 1.5% in 1996. Investment growth was negative and consumer spending weak. By 1997, unemployment in France reached a post war record of 12.8%. Economic growth had flattened, and economic pessimism permeated both public and private sectors.

Not only CGE have to operate in the difficult economic environment, but, as the largest employer in France in 1995 with more than 217,000 employees. Government attempts in 1995 to liberalize the labor market led to nationwide strikes and economic gridlock.

A lack of transparency and a weak corporate governance system made investors wary of French equities. By 1997, foreign investors' confidence in the opportunities in French market had grown somewhat, raising the overall level of foreign ownership of French equity market to 35%.

As a leading French company, CGE continually faced conflicting tensions.

Business Environment:

As opposed to the other countries where water utilities were strictly controlled by the central government, in France each of the 36,500 communes of the country individually controlled water supply and the cost to the customers.

Water treatment business is nearly a monopoly business for CGE. Although international expansion in the water treatment industry was limited until the 1970s, CGE signed its first contract with Venice in 1880. By 1980s more international water markets began to open up to the firm. Madame Thatcher and the World Bank were responsible for the explosion of international opportunities in 1980s.

By the 1990s, CGE was operating in many countries including China, Mexico, Argentina, Thailand, Philippines, and the United Kingdom. In 1995, 85% of French water supply was privately controlled, of which 40% was contracted to CGE and 20% to its largest competitor, Lyonnaise des Eaux. By 1997, 23% of water distribution and construction related revenues originated outside France. International push was underway in both waste treatment and energy as well.

ANALYZING THE FIRM:

CGE expanded rapidly throughout the 19th century into many local municipalities in France. Capitalizing on the large cash flow that the monopoly business generated, the company expanded rapidly in the domestic market. By 1995, CGE was controlling 40% of 85% privately owned water distribution in France.

In 1976, when Guy Dejouany stepped in, 80% of company's 15 billion Frf. in revenues were centered in the core business of water management, waste treatment and electricity. Two decades later, after annual sales growth of 26%, the company had reached 166 billion Frf. in revenue of which only 46% were still composed of those core activities. It had diversified into a wide variety of business including real estate, transport, healthcare and telecommunication.

Dejouany's vision was the guiding force behind CGE's aggressive campaign of diversification in the 1970s and 1980s, and cash flow from the core utilities business made the diversification financially feasible.

CGE started venturing in real estate business but ultimately it collapsed and CGE ended up with large loss in this business. It also expanded its business in telecommunications. In 1984-85, several highly talented engineers were hired away from France Telecom, the government owned monopoly. CGE's construction subsidiary, purchased for the apparent synergy of a similar customer base, was bought as a "poison pill" after St. Gobain, the French glass and material company, attempted to take over CGE in 1981.

When new CEO, Jean-Marrie Messier took over the charge of the company, he started managing the company in his own way. Central to Messier's new operating principles was that CGE must return to its core activities. Looking forward, his plan was to reduce the importance of Construction and Property while building the role of communications. Complete divestment from real estate had been eliminated as an option in the near term because Messier believed that the market would not allow a quick liquidation of these assets. Messier created alliances with cash rich partners to supplement CGE's resources in fast growth areas with high capital requirements.

Structure:

Structure of the firm was quite different in the period of two different CEOs. Both Dejouany and Messier had different way of managing the company with different level of experience and understandings.

In the tenure of Dejouany, number of employees grew significantly with the growth of the company. By 1995, number directly reporting to him was 70. He diversified the whole business into real estate development, healthcare, transportation, and telecommunication. He also emphasized on expansion of cross-shareholdings, providing voting powers to cross-shareholding companies.

During the tenure of Messier, he tried to reduce the number of stocks in the hands of cross-shareholders. He began a series of mergers to consolidate many of the 2,714 subsidiaries that composed CGE. He planned to reduce the number of water subsidiaries from 32 to 10. Further, instead of 70 direct reports, he would have only a dozen. An organizational chart was produced to clearly define the relationships between remaining subsidiaries. A newly formed Executive committee, composed of key directors from the main businesses, began meeting as a team on a bi-monthly basis. Each business had its own head, team and clearly identified objectives. He opened a new headquarters off the Champs Elysees in Paris to house the 215 members of corporate staff. Those occupying this office included finance, legal, human resources and investor relations. For