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Twilight Of A Czar (Int'l Edition)


Business Week International International Business: FRANCE

TWILIGHT OF A CZAR (int'l edition)

Alcatel Alsthom Chief Executive Pierre Suard hurries down a flight of stairs to the courtyard of an elegant Paris apartment house. Like royalty in exile, he is courteous but ill at ease as he ushers a visitor into a formal salon where soft spring light plays on richly upholstered furniture. Until he was barred from executing his duties by a French court on Mar. 10, Suard reigned over the world's largest maker of telecommunications equipment. The stillness now surrounding the secluded CEO is eerie. Although he's still Alcatel's chief, Suard is forbidden contact with the company pending the conclusion of corruption investigations that target him and the entire corporation.

Many French business people think Suard's career is over--regardless of the probe results--because Alcatel's tarnished global image needs cleansing. In fact, BUSINESS WEEK has learned that some Alcatel directors favor ousting Suard. That would be a stunning development in France, where a strong old-boy network protects the mighty. Confides one Alcatel director: "Suard won't be coming back." The board is waiting only to find a successor, he says, which will take "two weeks to three months.... When a new CEO arrives, Alcatel will be a different company." It may need to be, since earnings plunged more than 40% last year, and competitors are racing to pick off new markets.

Yet Suard, 60, says he won't give up without a fight. Sitting alone with a visitor under a crystal chandelier in the Alcatel-owned apartment, he claims the court inquiries into customer overbilling, purported illegal political contributions, and alleged personal use of company funds have been trumped up by a foreign corporate rival. He won't name it, but the Paris rumor mill thinks he has in mind Sweden's Ericsson. "I can't imagine this process could last so long after I have given such proof of my innocence," says Suard. "We are the victims of a campaign."

It's a bitter end for a man who by all accounts forged a model French career and played by the rules of the French Establishment. His fall has become a case study in how the traditional ties between French business and govern-ment are coming undone in the wake of Italian-like allegations of corruption and kickbacks. Pressure is mounting from a variety of forces: a newly activist judiciary and press, demands for clearer and more responsible corporate governance and the need, in a global economy, to break out of a protectionist mentality.

Yet Suard just missed sailing into retirement a hero. A quintessential product of French elite schooling, Suard, with his engineering degree from top- line Ecole Polytechnique, was a skilled technocrat. Like most of the French elite, he started his career as a civil servant, spending three years as a top aide in the powerful Ministry of Finance from 1966 to 1968.

FRENCH CONNECTIONS. Early on, he learned to maneuver with finesse through the labyrinth that links French politics and industry. Tight-lipped and formal, Suard never showed much of a gift for glad-handing fellow notables at the frequent social events that mark the Paris business scene. Yet he picked his friends well. One of those, Edouard Balladur, rose to become Finance Minister in the conservative government of the mid-1980s and today is Prime Minister and presidential candidate.

Suard's connections with the conservative Gaullists came in handy at a crucial point in his career at Compagnie Generale d'Electricite (CGE), France's giant engineering, transport and telecom conglomerate. He had joined the company in 1973. As head of the cable unit, he turned around the near-bankrupt division and made it CGE'S most international business through acquisitions in Germany and the U.S. His low-key demeanor pleased his demanding boss, Georges Pebereau, who was installed at CGE by the Socialists after they won the presidency in 1981. Suard quickly rose to become Pebereau's vice-chairman in 1985.

Suard played a key role in executing Pebereau's daring strategy to buy a stake in ITT Corp.'s phone-switch business, including its advanced but glitch-riddled System 12 digital switch. Suard headed the team that examined System 12 before CGE, with French government backing, cut the deal. Under Suard's guidance, the French company managed to fix the bugs in System 12, which became the No. 1 phone exchange system with 17% of the world market, according to researchers Dataquest Ltd.

The ITT deal transformed Alcatel from a telecom laggard into a global contender. But it was Suard, not Pebereau, who enjoyed the fruits of the ITT victory. When the Gaullists won the Prime Minister's office in 1986, Pebereau lost his job. Instead, the Gaullists--including new Finance Minister Balladur--put Suard into the top spot at CGE. Balladur later bowed to Suard's desire to privatize the company, which emerged with a new name, Alcatel Alsthom. When the Gaullists were out of power between 1988 and 1993, Suard employed Balladur as a consultant to one of Alcatel's subsidiaries, a job that earned Balladur $20,000 a month.

Soon after becoming CEO, Suard pursued his vision of making Alcatel big, which dovetailed nicely with French industrial policy. Losing ground in everything from computers to consumer electronics, the French desperately wanted a global winner, and Suard was happy to oblige. In interviews given in his baronial office in Paris' swank Eighth Arrondissement, Suard told analysts and investors of his dream of besting AT&T in phone equipment. A series of aggressive acquisitions around the world starting with ITT bought him that goal. "I wouldn't do anything differently," says Suard. "The strategy has been right."

But the world didn't stand still as Alcatel expanded rapidly. As telecom, computer, and media technologies merged and deregulatory forces started rumbling around the globe, savvy rival CEOs were breaking up rigid hierarchies and creating nimble subsidiaries. Yet Suard, known for his autocratic management style, was slow to adjust. The company also had a glaring weakness: It depended on state-owned France Telecom and Deutsche Telekom for the majority of profits. Operating in protected markets, these phone companies allowed Alcatel to sell them equipment at a generous markup. As a result, Alcatel was able to underbid rivals in foreign markets by charging higher prices in its home market. Yet this arrangement just delayed when Alcatel would have to operate without state aid.

Other weaknesses developed. While he prides himself on introducing English as the company's language, Suard failed at gaining a strong foothold in the U.S. Poor management oversight hurt Stuttgart-based Alcatel-SEL, which was slammed by price competition and huge penalties for being slow to deliver updated software for its switches to the German Bundespost. Losses at Alcatel SEL will total about $286 million in 1994. Alcatel also was beaten to market in such technologies as cellular communications by Nokia, Ericsson, and Motorola.

As late as 1993, Suard was celebrated in the French press for making Alcatel the biggest supplier of switches in the world. That all changed in 1994. A new generation of French prosecuting magistrates was pursuing leads on a variety of corruption cases involving local government, campaign financing, and Big Business. Alcatel got caught in the dragnet when two employees arrested for fraud told investigators of a scheme to systematically overbill France Telecom. Magistrates are now looking into several cases of alleged overbilling that may total $150 million.

Alcatel denies the allegations and questions the motives behind these revelations. Yet critics of France's cozy links between government and business wonder whether the France Telecom case exposes a technique crucial to the success of France Inc. Critics say Alcatel allegedly milked extra profits for its global ambitions out of France Telecom, which is supported by users of the phone monopoly. The extra profits, say these critics, were in effect government subsidies to Alcatel. France Telecom has remained silent on the issue.

Suard managed to stay above the fray as the prosecutors pursued the France Telecom case. But in July, 1994, a new investigation was opened--against Suard himself. Sources alleged that Suard had used $750,000 in company funds to refurbish his homes. He says the funds paid for a security system the company wanted him to install.

No matter. The prosecutors have widened their inquiry to include another swampy area of French national life: the money flows between national politicians and Big Business, which needs friends in government to win contracts and favorable regulatory treatment. In Alcatel's case, prosecutors are questioning the company about a trail of payments that flowed from Alcatel affiliates to offshore bank accounts and back to the Gaullists. One ex-Cabinet minister targeted in this inquiry is Gerard Longuet, who supervised telecommunications. He denies any wrongdoing.

Suard's role in these probes is a mystery. It's unclear whether he actively directed the alleged illegal use of company funds. Perhaps underlings committed the supposed transgressions. Or perhaps Suard saw nothing wrong with any of these supposed activities, which fit into a widespread pattern of corporate and government practice.

Some members of the Establishment are rallying to Suard's defense. In a page one editorial, the conservative daily Le Figaro worried that publicity-hungry judges were destabilizing a key French company. Balladur has expressed support for his embattled friend--although he has done nothing to stop the investigations. At least one board member says the judge's handling of Suard is "totally wrong." He also says "there's a lot more support for Pierre than anyone thinks." Oddly enough, the French corporate community has remained silent.

SURREAL APPEARANCE. Suard seems dazed by his ordeal. Although he inspires fierce loyalty in his aides, he is known to bridle at criticism. He even put a detective on an ex-manager who is a principal witness in the overbilling cases. Suard says the manager was suspected of helping a "northern competitior"--which observers think is Ericsson--in a destabilization campaign against Alcatel.

In the latest act, Suard made a surreal appearance on French television news on Mar. 15. In a major sign that France's elite is losing its sacrosanct status, journalists peppered Suard with questions. Defiant as ever, he blamed the scandals on this sinister destabilization campaign. He threatened to transfer the company to Brussels.

The denouement of this drama has yet to come. But observers already think L'affaire Alcatel is marking a decisive turn in how the French view the power plays of the national elite. "What you are seeing for the first time is the realization that government must divorce itself from playing a major role in economic development," says Nigel Deighton, European research director for Gartner Group, a technology analysis firm. Perhaps if Pierre Suard had sensed a need for this separation sooner, he would be enjoying an honorable end to a long and distinguished career.

Rise and Fall of a French Insider

1954 Pierre Suard's first step to joining the elite. Graduation from Ecole Polytechnique.

1960-73 Building the resume. Stints at Ministry of Public Works, Paris airport authority, Ministry of Finance, and engineering firm.

1973-85 Career takeoff. Joins Compagnie Generale d'Electricite, later renamed Alcatel. Turnaround expertise lands him No. 2 Job.

1986-93 Suard's golden era. As chief of privatized Alcatel, embarks on worldwide expansion.

1993 The first sign of trouble. Accusations that Alcatel overbilled France Telecom rock the company.

1994 The crisis. Suard placed under investigation for spending involving his residences, and judges pursue reports of illegal campaign financing.

1995 The fall. Suard barred from acting as CEO while investigations continue.

DATA: BUSINESS WEEKBy Gail Edmondson in Paris, with Marsha Johnston in Paris


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