Vivendi (A)

Revitalizing a French Conglomerate

Compagnie Gnrale des Eaux (CGE) Company Profile

French Multinational Company: Rank- 11th France , 60th World# Primary Business:
Water Utility Waste Treatment

Diversification:
Related Diversification: Public Utilities
Waste Management Energy Services Transport Services

Unrelated Diversification
Construction Property

#: Source: Forbes, July 28, 1997

Organization Chart
Generale des Eaux Group Utilities Construction & Property Communicatio ns

Water

Construction SGE

Telecommunica tions

Energy

Property: CGIS

Havas

Waste Management

UGC

Transport

Water Utility Business

Expansion in France

Core Business: Municipal water services management Water Supply in France: Controlled by communes 36500 Communes in France First Contract: Lyon(1853) Expansion to other municipalities:
Nantes (1854) Paris (1860) Nice (1864)

1995: 40% of the privately controlled water distribution (85% of French water distribution)

Water Utility Business

Global Markets

Internationalization: Trends of privatization seen globally Started with Venice (Italy) Moved to other countries:
China Mexico Argntina Thailand Phillipines U.K.

By 1990: 23% of revenues from outside France

Related Diversification
Other Public Utility Businesses

Logical Expansion: Expanding Service offering to local municipalities Water Utility -> Wastewater Treatment -> Construction, Installation, Rehabilitation of Water Systems -> Acquisition of Pipeline Company -> Household waste collection -> District heating networks -> Incineration and Composting Plants Waste Treatment and Energy: 25% of Total Revenue

Economics of Business
Political Associations

Affermage Agreements:
Municipality retained ownership of assets CGE managed and serviced existing facilities 10-15 year period

Concession Agreements:
Assets owned by a private company 20-30 year period Preferred by Asset providers like CGE

Developing Countries: Required investment in assets Need for Relationship Management with communities:
Decentralized Business Leveraging political contacts Choosing highly connected individuals

Guy Dejouany s Era (1976-1996)

Dejouany s Management Style

Personal involvement in all companys operations High Span of Control: 70 people directly reported to him Decentralized Decision Making: Increased number of independent subsidiaries Cash generated by CGE used to acquire and start new businesses Managerial Rewards: Salary rather than performance bonuses

Guy Dejouany s Era (1976-1996)

Diversification Strategy Mix of Related and Unrelated Diversification Funded by: Cash Flow from Core utility business Selection of New Businesses:
Personal Relationship and Experiences The Quality of People Trust in Individuals

Diversified into:
Real Estates Telecommunications Construction Subsidiary- To avoid takeover Hospitals Poor Service experience

Expansion of cross-shareholdings/portfolio investments:

11 bn Ffr of CGEs Assets tied to other publicly traded companies. Industries and Banks were similarly stakeholders in CGE Re-privatization of Nationalized Companies: Private Firms encouraged to own new shares Enhanced Voting Rights for the companies: Significant impact on control at the board. 18.3% of CGE stock= 24.3% of Voting Rights

Emerging Problems (the 1990s)

Reasons:
Large capital expenditures for diversification in 1980s Disintegration of Real State market in 1991 Scandal in the water business in 1995

Cash Crisis (by 1995):

Phenix, CGEs real estate sub had cost the company 60 bn Ffr Debt/ equity ratio reached 155% Real estate disaster signaled governance issues

1995 Corruption Scandal:

Large payments in bribe by CGE to Socialist politicians alleged Despite this, the water business generated 41 bn Ffr in 1996 Water business accounted for 80% of CGEs operating profit

Business Context of France in 90s

Challenges:
Difficult economic environment Pressure to maintain employment levels 217,000 employees at stake Rigid labor regulations, strong unions increased labor cost Nationwide strikes after govt. attempted to liberalize labor market

Capital Markets:
Lack of transparency, weak corporate governance system
resulted in weak French equity markets, wary investors

Absence of a domestic pension system

meant no source of much needed investment capital

Pressure from domestic and outside institutional investors

initiated corporate governance reforms increasing financial transparency focus on free market purism and not on social stability

New CEO: Jean-Marie Messier

Vision
Return to core activities: Utilities, Communications, Construction Shift focus from Construction to Communications

Divestment
Reduced leverage by selling peripheral assets worth 6 bn Ffr Divestment in non core businesses real estate, health care, catering Still left with a diverse portfolio amusement park, parking garage etc

New CEO: Jean-Marie Messier

Partnerships
Alliances with cash rich partners for fast growth Southwestern Bell and Vodafone in telephony French Railroads in telecommunications infrastructure

Restructuring
Series of mergers to consolidate many of the 2714 subsidiaries CGE reduced its stake in SGE (main construction subsidiary) to 51% Focus on profitability and not on volume Firms belief that multiple subsidiary approach had become inefficient Parallel consolidations in Energy and Waste

Corporate Office
CEO s span of control reduced Organizational chart and clearly defined relationships Integrating businesses to eliminate internal competition Corporate office to manage strategic decision making ROI and cost of capital to be determined for each business Reduce cross subsidization in the future

Managing Human Resources

Increase employee mobility Top managers to be circulated among various divisions To create better trained general managers for CGE Internal job transfer chart

Incentive Systems
Performance related incentives for managers Uniform performance management system Pay linked to ROI targets for major division heads One time stock options for top 25 managers

Creating Shareholder Value

Message of shareholder value spread to employees Investors expressed confidence in Messier s new directions

Strategic Direction
Utilities to focus on international expansion and multi-service contracts Construction and property to be made attractive to investors

Communications business Build a strong domestic base Become second largest player in France and major international player Proposed merger with Havas, France s largest media group Financial and operational restructuring

Changed the company name to Vivendi

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