France Takes Off

When 27-year-old Michel Meyer learned last Friday morning that the Internet company he founded in 1995 was flirting with a $1 billion capitalization on the French stock market, he decided it was time to pop the champagne corks. He'd been to Silicon Valley in the early 1990s. He knew this kind of thing could happen there. But in France such high-speed success was unheard of until recently, and for all practical purposes, so was the Web. Meyer had set up a chat site called The Virtual Baguette. He wanted to build it into a French-language portal called Multimania. But very few financiers would listen. "When we came back five years ago and said what we were going to do," he recalled with a broad smile, "everybody said, 'Well, good luck, guys'."

Well, good luck --and hard work--have paid off. But not just for Meyer. France has experienced such a turnaround in its fortunes over the past two years that the whole country seems to be caught up in the excitement. You could see it in the faint grin of dour Finance Minister Christian Sautter when he announced earlier this month that the economy would grow at a 3.5 percent clip this year. The hottest fiscal issue of the moment is what the government will do with the "jackpot" of unexpected tax revenues prosperity has thrust upon it: 7.62 billion more than expected. You see it in the zest with which French CEOs such as Alcatel's Serge Tchuruk, LVMH's Bernard Arnault and Vivendi's Jean-Marie Messier wade into the global merger wars, confident that their companies can compete with the best the world can throw at them. You see it in the IPO calendar, with at least 15 firms set to follow Multimania in the next few months. You see it in the shift from a culture of unemployment where the jobless were wont to demand Christmas bonuses from the state, to one of opportunity, where students are being hired straight out of school--or even before they graduate (sidebar)--and venture capitalists are looking at an avalanche of business plans. After decades as Europe's also-ran economy, France is now the clear leader among the Big Four, with sustained growth rates since 1998 that are well ahead of Germany, Italy and the United Kingdom (chart). Unemployment, which was in rising double digits during the mid-1990s, is on a steady downward curve. The stock market has taken off, as foreign investors, especially Americans, see the potential for growth, and investing in stocks continues to gain favor among the French themselves. The CAC 40 index, which measures the traditional Bourse, is far outpacing the Dow Jones industrial average. Technology stocks have the Nouveau Marche, Paris's new market, rising as fast as the Nasdaq.

Why France, and why now? Isn't this the country that's trying to create jobs by mandating a 35-hour workweek? Don't Germany and Britain have plenty of dot-com start-ups too? Yes and yes. But it's also the case that a powerful array of forces--some obvious and predicted, some less so--are coming to bear at once to produce a bottom-up change in the way that France, that famously top-down country, works. It has long been clear that the euro would force mergers and cause capital to flow to those who can use it best. What few guessed was that France's business leaders would prove more aggressive than Germany's (for example) in doing something about it.

Partly, France got lucky. It was less exposed in Asia and Russia when their economic crises hit in 1998. But the surge in optimism goes deeper than that, and the French point to everything from their 1998 victory in the World Cup to the ability of the European Airbus consortium (based in Toulouse, France) to outsell America's Boeing, or the decision to build the Queen Mary II in the Saint-Nazaire shipyard. The French art scene is vibrant for the first time in years, with the restored Pompidou Center leading the way. Why, the French have even been exporting music with techno groups like Air and Daft Punk.

Perhaps most important, there is a sense in France this spring that old rules and taboos are breaking down. Money is good. Work is good. In a country where "bourgeois" has often been used as an epithet, and whole generations were raised to believe capitalism was vaguely suspect, that's a fundamental change in attitude.

Swishing some bubbly around in a plastic cup, Meyer said that private citizens placed 250,000 orders for Multimania stock before last week's IPO, almost double the number for any previous subscription on the Nouveau Marche. "I think the fact that so many people are playing the market shows that capital is no longer the Devil," he said.

French politicians are increasingly aware of the new mood, even if they often seem confused by it. The socialist government of Prime Minister Lionel Jospin was instrumental in creating tax breaks for start-ups. But it's also the author of the 35-hour workweek scheme, which went into effect at the beginning of the year for companies with more than 20 employees. From corporate boardrooms to the tiny maids' rooms where many French start-ups are born, that's led to a standing joke: "I like the 35 hours so much, I do it twice a week."

Gaullist President Jacques Chirac, for his part, visited a high-tech "incubator" in eastern Paris this month as if discovering for the first time what the New Economy was all about. As the founders of a Web zine called showed him how to receive his daily horoscope, he had to turn to aides and ask, "What is our e-mail?"

Make that mel. The Finance Ministry, of late, has tried to stem the epidemic of English arriving with the New Economy. Mergermania is supposed to be la fusionite. Trickle-down effect should be effet de percolation. Start-ups become jeunes pousses. But outside officialdom, few of these terms have taken hold, or are likely to.

The state, clearly, finds it hard to let go of the language, society, economy and enterprises it has tried for so long to control. But it's also clear now that the tight alliance between the state and big business that gave France 30 "glorious" years after World War II became a barrier to prosperity in the 1980s and 1990s. The privatization begun in the late 1980s is still not complete. Airbus is not yet a stand-alone company. France Telecom has offered only a fraction of its stock to the public. But the trend toward greater public participation is inevitable.

Few understand that process better than Jean-Marie Messier, who first made a reputation for himself as an enfant terrible handling privatizations for the Ministry of Finance when he was only 29. Now 42, and a veteran of the private sector, Messier heads the enormous corporation he has renamed Vivendi. When he took it over in 1996, it was a sprawling 150-year-old conglomerate called Compagnie Generale des Eaux. Messier sold off 26 billion worth of assets and narrowed its focus from 25 distinct lines of business to two major groups: water supply and treatment on the one hand, and communications on the other.

In January Messier positioned Vivendi as the pivotal player in the epic battle of British-based Vodafone AirTouch to take over Germany's Mannesmann. Klaus Esser, Mannesmann's chairman, thought Vivendi would back him or might even merge with him. At the time, Vivendi itself looked like a potentially vulnerable target. Messier kept both sides in suspense, then called Esser and gave him the bad news in a series of messages on his mobile-phone voice mail. Vivendi was not going to back Mannesmann, and it was entering a strategic agreement with Vodafone to launch a "multiaccess portal" when the takeover was complete.

As Messier told the story in his office overlooking the Arc de Triomphe last week, he portrayed it as more than a victory for Vivendi's strategy and tactics. "To a large extent France has taken the lead over Germany the last 18 months," said Messier. He argued that the untangling of crossed shareholdings is further along in France than in Germany, citing Vivendi as proof. Employees are now Vivendi's single largest group of shareholders, followed by American pension funds that have increased their stake from 2 percent to 12 percent in the past four years. Clearly, investors on both sides of the Atlantic are happy with the trend. Vivendi's stock was sliding into the 60 range back in November, rose to the 80s as the Vodafone deal took shape and has shot up to the 140 range since.

All of this sounds like the democratization of capital in France. The state retreats. Stockholders multiply--and are satisfied. Messier calls it "the end of France Inc." But the huge presence of corporations like Vivendi now and in the future may well present new problems for aspiring entrepreneurs. Messier, for instance, sided with Vodafone largely because it endorsed his plans for the single multiaccess portal that consumers will soon find on their interactive televisions, and the new generation of Internet-enabled mobile phones now available in Europe. (Oh, yes, and also on PCs, although Messier thinks they are an appliance of the past.) Messier calculates that Vodafone, Vivendi (through its Cegetel arm) and Mannesmann have 70 million mobile-phone subscribers, and will get an additional 40 million by the summer of 2001. Add to that the 40 million current subscribers to Vivendi's Canal+ pay-television networks in 11 different countries. The advertising base alone should provide enormous revenues.

For Michel Meyer, whose Multimania portal will have to face that competition, this is obviously a threat. Meyer likes to say that the race will go to the fast, not the big. But Messier is fast, really fast, and so are other captains of the New Economy in France.

Take Bernard Arnault. He spent a decade pulling together the vast luxury-goods conglomerate LVMH Moet Hennessy Louis Vuitton. But he decided to stake out a position in Internet companies only after he saw the enormous gains he made on his investment in the U.S. auction site eBay (founded in America by French emigrant Pierre Omidyar and his wife) after the IPO in September 1998. "I started to think about what we could do to get involved in technology," Arnault said dryly. By last summer his holding company had spawned Europe@Web, with $500 million to invest. So far, it's spent $350 million buying interests in everything from the Swedish online clothing site,, to such prominent American companies as the financial site Datek, and Last year, in the space of six weeks, Arnault and the British retailer Kingfisher created a free Internet service provider called LibertySurf. Next week, when its stock is offered on the Paris Bourse, Arnault expects it to be worth $3 billion. "It immediately will be among the 50 largest French market caps," Arnault told NEWSWEEK, "which is amazing even for us."

And it's intimidating for entrepreneurs. As a result, many of France's start-ups expect to sell out before their companies ever get to be very big, or very old, or even make a public offering. "The markets are opening for competition, but that works only if the small guys can grow and can eventually threaten the big guys," said Meyer. Yet he concedes he may be the exception rather than the rule. His site, at the moment, is among the five most visited in France. The other four are all controlled by older, established corporations. "If I weren't among the top five, I might not have done this," he said.

France's New Economy--and, indeed, French capitalism--is still a work in progress. It's not going to be an imitation of America, and may well be hard for Americans to understand. "It's quite difficult for U.S. companies to succeed on their own here [in Europe]," Arnault said confidently. "Things are moving fast and on many fronts at the same time and--you have players such as ourselves." The young, the restless and the imaginative, like Meyer, know they'll have to come up with original strategies if they want to hold their own in their own country. But for the moment watching Multimania's market value roller-coaster in the $750 million to $1 billion range, Meyer's enjoying a glass of bubbly. And so, in its way, is the rest of France.