http://www.businessweek.com/stories/2001-10-14/europes-winners-and-losers

Magazine

Europe's Winners and Losers


Greek-born entrepreneur Stelios Haji-Ioannou is in an unusual position: He's both benefiting and suffering from Europe's economic downturn. His London-based easyInternet Caf? chain, which he hoped to make the McDonald's of Web access, has burned through $58 million in two years. Now, faced with price-sensitive customers and spiraling expenses, the founder had to dig into his own pockets for $22 million to keep his 20 outlets open in 12 European cities and New York. He has sacked the company's CEO and shuttered stores in Rotterdam and Antwerp to preserve cash.

But another of Haji-Ioannou's half-dozen ventures, discount airline easyJet, is flying high. The carrier took in an estimated $522 million in the year ended Sept. 30 ferrying passengers between London and 15 other European destinations. While major European flagships such as Air France and Lufthansa saw double-digit declines in their business after last month's terrorist attacks in the U.S., easyJet bookings rebounded within a few days to pre-September 11 levels. In fact, analysts say the airline is likely to gain market share during the downturn. Its key strength: costs that are 50% lower than those of leading European carriers. "Our planes are as full as ever," Haji-Ioannou says. In a recession, he adds, customers look for cheaper tickets, "and the lowest-cost producer will win."

Haji-Ioannou's experience underscores how the worst economic slide in nearly a decade could reshape Europe's corporate landscape. It will create new opportunities for some company bosses to fall flat on their faces and for others to gain on their rivals. The reshaping will affect companies both big and small. Many of the old behemoths, particularly in telecommunications, are well-positioned to snatch up the weakest upstarts. But a number of small and scrappy companies will hold their own.

DATED CONCEPT. What's clear is that Corporate Europe is heading into a new era of upheaval, similar to the painful period of 1993-94, when a recession pushed many companies to the brink. And the fast-paced developments of the past few weeks have already dramatically changed the landscape, producing results that would have been unthinkable just a few years ago.

Start with the airlines. Swissair, once one of the great blue-chip carriers, has already fallen victim to strategic blunders and the sudden downturn in air travel. It grounded its fleet on Oct. 2 and filed for protection from creditors. A day later, the Swiss government pledged up to $280 million to keep the airline afloat until Oct. 28. But business execs think real consolidation in the European airline industry will finally occur, with such weaker or smaller carriers as Alitalia and Austrian Airlines forced to find mates or risk perishing. "The concept of one nation, one carrier probably doesn't fit with market conditions," says Philippe Camus, co-CEO of the European Aeronautic Defence & Space Co.

The turmoil will create openings for the discount startup airlines that have strong balance sheets. Thus, Go, a discount carrier previously owned by British Airways PLC, is repositioning itself to attract business travelers looking to save a little on their tickets in hard times. Other discounters will expand. Ryanair, the biggest budget airline in Europe, has said it would consider offering service on any routes abandoned by flag carriers.

VIVENDI'S GAMBIT. The sudden downturn is also exposing cracks in relationships that once looked set in stone. Vivendi Universal's French cell-phone division recently balked at paying the French government its first down payment on a $4.5 billion fee it had pledged for a new operating license. The company, long considered a French national champion, eventually coughed up the money but said it might withhold further payments. It's playing a risky game, but it has to: Unless the government cuts the fees, Vivendi cannot make money from its next-generation mobile network.

Other telecom operations are feeling the pain, too. Global TeleSystems, an American broadband player that tried to skim off lucrative segments of Europe's phone business, is now haggling with creditors as it struggles to stay afloat. Others, such as New York-based Viatel Inc., are in bankruptcy.

These companies, once considered sexy new plays in the booming telecom business, are now scrambling for capital. They won't find it in the equity markets. Equity issues by European companies last month totaled only $2.6 billion, 80% less than a year earlier. The European venture-capital unit of Softbank Corp., the Japanese investment group, announced on Sept. 27 that it was returning $200 million to corporate investors, who had asked for the money back because they needed capital for their own businesses. "Whoever needs big money is in big trouble," warns Gian Luca Braggiotti, founding partner of myQube, a Brussels- and Milan-based venture fund.

But some new telecom players have staying power. Take Netonomy, a privately held French-American maker of customer-service software for mobile-phone operators. "The macroeconomic conditions are just horrendous," says CEO John Ball. "But our own market niche is booming." Netonomy is turning away investment offers, while other startups are being left to die by fleeing VCs.

Money woes afflict the giants, too: Phone giants Deutsche Telekom and France T?l?com are saddled with debts of more than $60 billion apiece. That has slowed their investments to a crawl and clobbered telecom equipment makers such as Sweden's Ericsson, Germany's Siemens, and Finland's Nokia. Siemens is cutting 8,000 jobs in its telecom units, and it may share manufacturing with Motorola Inc. Even Nokia, the only handset maker making money, announced 260 job cuts on Oct. 1.

But that turmoil creates openings for smaller players. France's MobileWay Inc., which offers data network services to mobile-phone companies and Internet service providers, just raised $27 million. In ordinary times, the niche MobileWay fills may have been grabbed by big phone companies.

It's not just the best of the small players who will find opportunities in Europe's wintry corporate landscape. Behemoths can win, too. Look at the big insurers and reinsurers. Munich Re could pay out $1.93 billion and Swiss Re $1.25 billion to settle claims from the September 11 attacks. But longer term, the big carriers will likely raise rates and sell more policies as more companies and persons seek disaster insurance. Big insurers also could go shopping for acquisitions in the U.S., where smaller players are now vulnerable in the wake of the attacks. After the short-term shock, the big underwriters may actually improve their position. Meantime, that shock is being felt in every boardroom in Europe. How each company reacts will help create the continent's next generation of corporate winners and losers. By Carol Matlack, with Andy Reinhardt and Stephen Baker in Paris, David Fairlamb in Frankfurt, and bureau reports


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