The Debutantes

1998 was a bumper year for IPOs. If only the stock-market newcomers knew then what they know now.
Tim BurkeMay 5, 2008

When French energy and transport company Alstom made its debut on three stock exchanges on June 22nd 1998, it did so with the kind of flourish that was expected of Europe’s biggest-ever corporate IPO. In Paris, it let loose 700 balloons adorned with its logo. In London, a team of abseilers scaled the stock exchange building, unfurling a huge canvas with news of the IPO. And in New York, a full-scale model of the TGV, the high-speed train that Alstom manufactures, was made to appear as if it had charged down Wall Street and crashed into the exchange.

Such fanfare fitted right in with the market euphoria of 1998. Though quickly surpassed by even giddier IPOs in 1999 and 2000, a record 368 European companies launched listings in 1998, worth a total of €31.5 billion. They did so on a variety of exchanges, from London to Luxembourg, many with multiple listings in Europe and the US.

But the euphoria would be short-lived. For many of the companies launching Europe’s big-ticket IPOs in 1998, their early history as public entities would be marked by turbulence, from the bursting of the dotcom bubble and the implosion of Enron to the arrival of Sarbanes-Oxley and the invasion of new, more demanding shareholders. Some have since been acquired, like UK holiday company Thomson Travel, which was bought by Germany’s Preussag two years after its float. Others have been part of industry mergers, like Finnish telecoms company Sonera, which hopped into bed with Sweden’s Telia in 2002 to form TeliaSonera. The class of ’98 also included some casualties, like Gretag Imaging, a Swiss photofinishing firm, which went bust in 2002.

For the ’98ers, their first decade as public companies has been a white-knuckle rollercoaster ride, putting executive teams’ turnaround and crisis management skills to the test. Their CFOs today look back over the past ten years older, and much wiser. “Whatever a CFO can face, I think I’ve faced it,” says Juha Laaksonen, finance chief since 2000 of Fortum, a €4.5 billion Finnish energy company that listed in Helsinki on December 18th 1998.

Fortum: New Energy

Fortum’s market debut, which earned the Finnish state 2.7 billion markka ($540m at the time), had all the excitement and frisson of that era’s crop of IPOs. However, the company was among the debutantes whose shares sputtered the quickest. After finishing their first day’s trading at 33.8 markka (about €5.6), they languished below that price for most of the next three years.

According to Laaksonen, a big part of the problem was that investors struggled to get their heads around the new company, formed when Finland’s state-controlled oil and energy firms merged shortly before the IPO. “It was probably the first merger where a power company and an oil and gas company were put together to become a big energy company in a very wide sense,” says Laaksonen, a company veteran who had worked his way up the finance ladder at Neste, the oil side of the business. “The market follows either power or oil, but not both.”

An even bigger problem for investors was that Fortum lacked a clear strategy. “The market gave us such terrible comments — ‘This company hasn’t got any idea where it’s going,’” Laaksonen recalls. By 2000, CEO Heikki Marttinen had been ousted by his fellow directors, putting Laaksonen’s predecessor, Eero Aittola, temporarily in the chief exec’s job until the arrival of Mikael Lilius. Laaksonen, in turn, stepped up to the CFO post.

Under Lilius, the group began to focus on a single goal — to become the Nordic region’s benchmark power and heat company. To do that, says Laaksonen, Fortum would use a combination of acquisitions and divestments. And it was important for the board to agree that “nothing was sacred.” While it was “very nice” to have businesses in markets as diverse as the UK and Thailand, they had to go if they didn’t fit with the strategy. Eventually the divestment programme would include all of the group’s oil business, which was spun off in an IPO in 2005, further refining its strategic focus. It was an imposing programme.

“The company’s market value on September 1st 2000 was €3.1 billion — I remember that very well because we’ve calculated it so many times,” Laaksonen says with a laugh. “We’ve also calculated that if you take all the acquisitions from just before that time onwards, and all the divestments, we made €7 billion of [each]. That’s a huge amount of restructuring compared to the market value of the company when we started.”

It was also a big test personally for Laaksonen, whose attention swung “from big restructurings to integrating then demerging a finance function, to funding to selling stories to investors and working on internal development improvements,” he says. “It involved keeping a lot of balls in the air at the same time.”

The sweat paid off. In a research paper published in 2006, Credit Suisse said the company had transformed itself from a “conglomerate with little strategic and geographical focus to a vertically integrated leader in the Nordic power value chain.” In 2007, Fortum posted a €1.6 billion profit on sales of €4.5 billion. Perhaps more importantly, given shareholders’ past confusion, its shares are now trading at about €25 after reaching an all-time high of €30 in January.

“Delivering the restructuring is one of the reasons we have a premium rating in the power industry now,” Laaksonen says. “There is a trust in the delivery, and that was an important process in building confidence in the capital markets that this company is going somewhere.”

Rhodia: Chemical Reactions

Investor confidence was in short supply at another 1998 IPO company, French speciality-chemicals firm Rhodia. After an IPO in Paris and New York on June 25th 1998, and the full demerger from its parent Rhône-Poulenc in 1999, the company ran into trouble. Five years after its debut, it reported an €1.3 billion loss following write-downs worth €850m. As for its shares, at one stage they had lost an eye-watering 95% of their value since the IPO, reaching a low of €0.95 in 2004, with plenty of volatility to boot.

While the economic downturn was partly to blame, a string of “probably not-so-wise” acquisitions shortly after its IPO also dogged the company, concedes Pascal Bouchiat, who in the year of the flotation moved from his job as controller at Rhône-Poulenc to become group treasurer of Rhodia, winning the promotion to CFO in 2005. Though its transition from a subsidiary to a standalone listed company was far from complete, Rhodia was keen to be part of the frothy industry M& A of the time, embarking on an ambitious shopping spree, with disastrous results.

At its lowest ebb, Rhodia was confronted with a new phenomenon spreading across Europe — shareholder activism. Much of it was aimed at its acquisitions. One that drew particular ire was ChiRex of the US, bought in 2000 for $510m in cash (and $35m of the target’s debt) in a deal that The Financial Times later described as “the most egregious of the many overpriced takeovers of the time” in the speciality-chemicals industry.

In 2004, Rhodia became the subject of a French judicial enquiry after two shareholders — Hughes de Lasteyrie, a Belgian financier, and Edouard Stern, a French banker — filed a lawsuit accusing it of false accounting and other malfeasance. While rejecting a number of the claims, the AMF, the French financial watchdog, settled the case in June last year, fining Rhodia €750,000 and ex-CEO Jean-Pierre Tirouflet €500,000 for misleading investors about the group’s debt between 2001 and 2003 as well as financial details surrounding ChiRex.

Within five years of its IPO, Rhodia was in turnaround mode. In an all-too-familiar scenario among the 1998 debutantes, this consisted of €1.5 billion of divestments over three years — including ChiRex, which was sold as part of Rhodia Pharma Solutions to Shasun Chemicals & Drugs — and a programme to cut around 20% of its €1.5 billion fixed-cost base. Those two programmes, says Bouchiat, were important in helping to get Rhodia’s “overweight structure” into a more manageable size, with the number of business units reduced from 17 to seven, while finance, IT and other support functions were also streamlined.

Equally important, of course, was Rhodia’s refinancing. With the ultimate aim of boosting its “financial flexibility,” Bouchiat helped steer the company through some 15 major transactions between 2004 and 2006, including rights issues, syndicated credit lines and securitisation programmes. “What’s changed a lot since 1998 is our financial discipline, whether it’s in terms of our capital structure or working capital management,” he says.

After several years of losses, Rhodia began reaping the rewards of the turnaround in 2006. Last year continued the upward trend — net profit doubled, to €129m, while sales increased 5.6%, to €5.1 billion (restated as €4.7 billion after further divestments) and free cash flow reached €161m. Following a reverse share split in mid-2007, the company’s shares are today trading more than 51% higher than their adjusted 2004 low, at around €14.

Bouchiat disagrees with suggestions that life would have been easier for Rhodia had it been out of the glare of public scrutiny. “I don’t see any disadvantage of being a listed company in this type of situation. It’s a good way for the management of a company to be under positive pressure and reporting on a quarterly basis about the progress of the recovery programme.”

In any case, it’s nice finally to be out of crisis mode. Rhodia can now get on with doing what it meant to do after its IPO, Bouchiat says. “It’s a new start for the company.”

Alstom: Train Wrecks

Even without its pre-IPO entertainment, Alstom wins the prize for the most dramatic 1998 debutante. As a spinoff of the UK’s GEC and France’s Alcatel that year, the company was faced with untangling various ownership structures, setting up an entirely new organisation independent of its former parents (which remained major shareholders), and integrating two recent French and German acquisitions, recalls CFO Henri Poupart-Lafarge, who was hired from the French government’s privatisation team to lead investor relations at Alstom shortly before its IPO.

But plans were swiftly thrown off course. Within months of listing, CAC-40 member Alstom was hit by the Asian financial crisis, sending its share price tumbling to around €15, less than half of its listing price, before quickly climbing back up to about €34 following the news of a 50:50 joint venture with ABB. But the relief was short-lived.

By the early 2000s, “we had bad news coming in all directions,” says Poupart-Lafarge, who had moved from IR into finance at Alstom’s transportation and distribution division in 2000. Among the bad news: delayed train contracts, the bankruptcy of Renaissance Cruises, a key customer, and faulty gas turbines that it inherited in the ABB deal, which would cost some €1.6 billion to repair.

How did Alstom get itself into this “almighty mess?” asked one newswire journalist at the time, noting that “slack financial controls, opaque disclosure and technical problems have proved as humbling for Alstom’s management and as disastrous for the company’s shareholders as the internet and telecommunications bubbles have been for so many European companies in those sectors.”

The company certainly had a mountain to climb in restoring investor confidence as bankruptcy threatened in 2003. After warning that it was expecting to record a loss of €1.3 billion that year, its announcement of a sweeping turnaround plan failed to impress the markets, leaving its share price to trade at a dismal €1.36 in March. By the end of the year, all that stood between Alstom and bankruptcy was a €3.2 billion refinancing plan, including a controversial state bailout covering nearly a third of the total. Further European Commission-approved financing took place during the first half of 2004.

It was then that Poupart-Lafarge stepped into the CFO job, joining new CEO recruit Patrick Kron. Alstom’s balance sheet immediately got Poupart-Lafarge’s attention. To avoid the costs of a major refinancing deal, Poupart-Lafarge “took a kind of step-by-step approach, taking advantage of each improvement in our operational situation so that we had no high-yield debt.”

By 2006, Alstom was back in the black, turning a €628m loss the previous year into a profit of €178m, while meeting targets on free cash flow (€525m) and operating margins (5.6%). The good news continued in 2007, with profit of €430m on revenue of €14.2 billion. As for its shares — which were delisted from London in 2003 and New York in 2004 — they hit a post-2005 reverse split high of €165 last November.

So what lessons does Poupart-Lafarge believe the CFOs of 1998’s IPO companies can offer their counterparts in 2008? The first involves “people management.” One of his first jobs as CFO at Alstom, he says, was to rebuild confidence internally, an area that often gets ignored during a crisis at listed companies. He started with his finance staffers, rolling out new training programmes, global job rotations, networking groups and several other HR initiatives.

His refreshed team, he says, formed a key part in Alstom’s new management culture, using finance to instil better rigour and discipline throughout the company. “The lesson is that there is no contradiction between putting in place extremely tight controls and the growth of the company,” he notes.

The other lesson: “We never, ever cut the dialogue with investors, no matter what happened to the company,” says the former IR executive, who organised a series of road shows as soon as he was appointed CFO. Wooing investors might eat up a lot of a CFO’s time, he concedes, “but it pays off.” Better late than never.

Tim Burke is senior staff writer at CFO Europe.

View Class of ’98: The biggest IPOs by European companies that year.