France's Visible Hand
Laissez faire may be a French phrase, but, not surprisingly, it was the English who gave it its popular economic meaning. Rather than letting French companies flourish-or fold-on their own, the French government feels compelled to lend a "helping hand." The Gaz de France (GDF)-Suez merger troubles, brought on by government interference, exemplify France's present and future economic problems. Even with the upcoming elections, the prospects for meaningful change on economic policy seem grim. Will French industry remain globally competitive in this interventionist climate?
The $80 billion Gaz de France-Suez tie-up was publicized by French Prime Minister Dominique de Villepin almost a year ago-and problems have plagued the deal ever since. The proposed merger of GDF, a state-owned gas utility, and Suez, a publicly traded Franco-Belgian water and power corporation, would create Europe's second-biggest utility company and a huge buyer of natural gas. Soon after the Italian firm Enel announced its interest in acquiring Suez, the French government swooped in, putting forward the GDF-Suez arrangement. It is telling that a French government minister, rather the chief executives of Gaz de France and Suez, hosted the press conference announcing the deal.
Enel protested that the French government's proposal violated the EU's competition rules, but Finance Minister Thierry Breton proclaimed the French government's innocence. Yet the state's past record suggests that the merger announcement was intended to deter a foreign takeover of Suez. In fact, the merger plan epitomizes the "national champion" policy that the French government has pursued for years. Certainly, a successful French firm can no longer be a national champion if it is bought by a foreign company-even if the buyer in question is also European. To prevent such takeovers, the French government employs its political arsenal-crafting legislation on corporate poison-pill rules or labeling certain industries as "vital to national security." Or, as in the Suez-GDF tie-up plan, the state throws its weight behind a preferred alternative option, offering flimsy excuses for its actions.
Like Suez, the French pharmaceutical firm Aventis faced the possibility of being bought out by a foreign firm-in this case, the Swiss drug company Novartis. Before Novartis had the opportunity to place a formal bid, then-Finance Minister Nicolas Sarkozy pushed through a merger between Aventis and its Strasbourg-based rival Sanofi-Synthélabo. As finance minister, Sarkozy also arranged for an expensive state-sponsored rescue of Alstom. In other countries, the French firm-with a crashing share price and crushing debt burden-would have been allowed to go out of business. However in France, economic nationalism trumps the more efficient operations of the market; the current Suez case is not an exception to this rule. Even if the Suez-Gaz de France merger fails, Chirac's government can claim at least a modicum of victory-Enel eventually abandoned its bid for Suez.
The French government plans to hold 34 percent of the merged company's shares, allowing it to retain a strong decision-making role in the proposed French energy champion. French enterprises like Air France or the bailed-out Alstom have met similarly "privatized" fates-with the French state hanging on as an important minority stakeholder. Unfortunately, this state ownership of shares crowds out private domestic investment in French companies.
Meanwhile, the merger deal, as it stands, satisfies no one. Suez shareholders are justifiably angry at the proposed merger deal, as they will only get a pittance for their shares. The quarrelling, distrustful executives from both firms-who cannot even agree on the name of the merged company-will have to share power once the two firms are combined. This dual management structure has already fared poorly at the Franco-German EADS; a wiser solution would simply be to put the executives with the best track records in the highest positions.
The Socialists tacked more than 100,000 amendments onto the GDF privatization bill, hoping to bury the merger in a flurry of paper; the CGT, a powerful union, attacked the merger as "treasonous"; and even Nicolas Sarkozy initially opposed the deal. Even as the poorly received merger continues to teeter on the brink of collapse, French politicians-especially de Villepin and Breton-who have staked their already tattered reputations on this dubious endeavor, cannot declare defeat. What should have been largely a business deal has now become, thanks to government intervention, a bitter political fight.
This fight will definitely continue, as the French constitutional court ruled that a shareholder vote on the merger must be postponed until after the French elections. Ségolène Royal, the Socialist candidate for president, has expressed her firm opposition to the merger; she pledges to renationalize Gaz de France if she is elected president. Ms. Royal is definitely not the candidate of choice for those who hope for an easing of economic restrictions. If a new Socialist government does not block the deal altogether, a shareholder vote will take place on June 25, and the merger could occur on July 1.