Economics, music industry

The strange story of Vivendi Universal

It’s been a while since I’ve looked at my last case in business school. But I am pretty sure, my successors today will certainly, sooner or later, be looking at a case study concerning the making and breaking of Vivendi Universal. There might even be two solutions to that case, one written back in autumn 1999, the other written in spring 2002. One praising the former CEO Jean-Marie Messier for his alleged vision of the converging digital world to come, the other one bashing him and the company he assembled before being sacked this summer as an obvious mistake. It might have been different back in the good old time, but in these days the half-life period of a given “right” business decision is probably measurable in fashion seasons.

The problem at hand is that there is no theory of the firm which could possibly make sense of what Messier did in the late 1990s. From a theoretical (economic) perspective, the conglomerate he created does not make a lot of sense – back then a lot of decisions seemed to be “driven by … naive heuristics …, or the pure seductive power of Hollywood.” (Bane, William P.; Bradley, Stephen P.; Collis, David J (1994): Winners And Losers: Industry structures in the converging world of telecommunications, computing and entertainment, good article, written back in 1997, when people still dared to admit they did not have a clue about the future…) In the end, there has been not even been a real transformation. So far even the media businesses remain largely distinct. What happened was that Messier used one company as a bank/collateral to buy others and then get rid of the original one. This process will be completed once Vivendi Universal will have divested its remaining energy and water supply assets. Jean-René Fourtou, Vivendi’s interim CEO made this strategy pretty clear at a press conference in Paris yesterday, confirming once more that “Vivendi Universal is basically an entertainment company”.

Thus, looking at the results of Messiers conquest, one can see the following three things:

  • The collateral – 41% of a profitable French utilities company, known as “Générale des Eaux” since 1853, now conducting business as Vivendi Environnement.
  • The bet – synergies, economies of scale and scope. The future value of a vertically integrated content production and distribution empire. But so far the empire is merely a bunch of still largely unrelated communications and media assets, most importantly the previously Seagram-owned Universal Entertainment group. As most acquisitions were made by share swaps, the real result of those transactions is that direct ownership of these assets has been transformed into indirect part-ownership of Vivendi Universal. The price paid for by Vivendi was, in the end, paid for hierarchical coordination of the day-to-day business conducted by the acquired companies. Eg, Vivendi board hierarchical conrol in combination with Bronfman family control of Vivendi’s board vs complete Bronfman family control in the case of Universal. But running the conglomerate proved to be a lot more difficult than anticipated. The problem in the current CEO’s own words is that ” Vivendi Universal [has] suffered a lack of management under Mr Messier and [is] ‘chronically over-diversified’.” (LINK).
  • The price paid – currently 19bn Euro debt, piled up during Messier’s conquest. It was probably necessary to oust him. Some people are good are good at conquests bad at consolidation. But that is what the new company needs most now.
  • No wonder, there is no economic explanation for this – apart from capital market imperfections. No one would have invested the amount of money Mr Messier could use to acquire the businesses he wanted in a new company. To acquire assets on the scale on which Mr Messier operated, he simply needed hierarchical control over a significant amount of financial resources. His conquest was a very expensive operation. But back in 1999/2000, a lot of overpriced companies bought other overpriced companies with their overpriced shares. No one back then thought of the possibility to wait and buy cheap after the burst. That’s the nature of a bubble. You somehow feel it’s there. But then, you would not bet on it if no one else does, would you?