French Midcaps: Healthy but Unhappy


The roughly 600 small- to medium-size companies listed on the Paris stock exchange are a major force in the French economy, generating more than $87 billion in annual revenue and employing more than 700,000 people. And while some erstwhile French corporate champions such as Vivendi Universal (V) and France T?l?com (FTE) have run up staggering debts and reported big losses this year, these midcaps are in pretty good shape. Trouble is, they're almost invisible to investors, representing only 5% of market capitalization on the French exchange.

Now, the midcaps are trying to raise their profile. MiddleNext, a group representing listed French companies with annual revenues under $1.5 billion and market capitalization under $650 million, is promoting an ambitious agenda of regulatory and legislative changes. Its goal: to boost investor confidence while addressing other problems, such as access to capital.

Leading the charge is MiddleNext President Bruno Vanryb, an entrepreneur who founded BVRB Software in 1984 with $3,000 in seed money. The company now has $40 million in annual sales, with operations in the U.S. and Britain, as well as France. It has been listed on the Paris exchange since 1996. Vanryb also is a founder of Croissance Plus (Growth Plus), a lobby group for French high-tech outfits. He recently sat down for a chat with BusinessWeek Paris Correspondent Carol Matlack. Here are edited excerpts of their conversation:

Q: How are French midcaps holding up in the current economic situation?

A: If you look at midcap companies in France today, it's a much happier story than the blue chips. It's true that market capitalization of midcaps has dropped by 40% since early 2000, but the CAC 40 [index of leading French blue chips] has fallen by 50%. Our study [a recent survey conducted by Ernst & Young for MiddleNext] showed that, on average, midcaps have an operating profit margin of 7%. That's very solid. And if you look at debt, the companies in the CAC 40 have a gross debt ratio that's 2.7 times larger than the midcaps. But we don't have enough exposure with investors. We midcaps are paying a big price for the current crisis, which is not deserved. It's important to let investors know that our companies are solid.

Q: How can you reassure investors, when markets worldwide are in a funk?

A: We want to create a new section for midcaps [replacing the Nouveau March? and the Second March?, two sections of the Paris exchange where smaller companies now are listed]. We need to rebuild on a new basis, with new rules -- for example, requiring quarterly disclosure, bilingual communication on their Web sites, more transparency. I don't see any other way to restore confidence.

Also, something must be done to limit large trades by hedge funds and other speculators. We have seen crazy ups and downs [in share prices] that have nothing to do with the value of the company. We need to limit the percentage of shares that can be traded at one time.

Q: Are midcap companies having trouble getting access to financing?

A: It's a very severe problem. The circle of financing is broken. You can't get venture capital to start up. You can't raise money on the stock market to grow your company. And because of that, the banks are afraid to lend. The amount of credit being extended to midcaps has been diminishing at an incredible speed, especially during 2002. By next year, it's going to have a huge adverse effect. There will be bankruptcies by companies that are solid...but can't get normal access to credit.

Q: Do you have any proposals to address this problem?

A: It's very important that we get Chapter 11-type legislation in France. [France has no mechanism for companies to continue operating after filing for bankruptcy.] Companies are being liquidated, jobs are being lost, and it's not necessary. Also, there are changes that could be made in banking regulation. For example, the government has a loan-guarantee program for small- and midsize enterprises, but it doesn't work efficiently. The government realizes this. It's trying, but more needs to be done.

Q: What's your assessment after the first six months of the center-right government, headed by Prime Minister Jean-Pierre Raffarin?

A: The new government is taking care of some things that needed to be done. A lot of stupid things have been eliminated. For example, there was a rule that before you could lay off workers, you had to have nine months of negotiations.

But the 35-hour work-week law [enacted by the previous Socialist government] is already in place now, and it's too late to change it. The price will be paid by French business over the next 10 years, and it will be terrible. In my view, the worst thing about this law is, you are promoting the idea that working is bad, and the less you work, the better your life will be.

Q: Then how will French companies be able to compete globally?

A: It's true that French entrepreneurs are running a race [while dragging] a ball and chain, but these [disadvantages] have not prevented us from being efficient. On the other hand, just think how efficient we could be without them!


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