When it rain it pours, they say. But nobody thought Gemplus would get quite so drenched after its initial public offering on both Euronext and Nasdaq in December 2000. After all, the Franco-American smart card maker was one of the darlings of the tech bubble era and fully expected be worth over $7 bn by 2005.
But the forecasts were wrong. Despite initial share price increases, it soon became clear the timing was off and the telecoms industry was plummeting. Like most other tech firms, Gemplus took a thrashing over the next two years.
But now the Luxembourg-headquartered company has E400 mn ($455 mn) in cash and notably low levels of debt. It has continued to strengthen its leading position in the smart card market with over 564 mn phone cards shipped worldwide last year. It is also in the final stages of an overhaul that promises to bring the company back to profitability.
Early days
‘We were so bullish,’ says Yves Guillaumot, Gemplus’s charismatic French CFO, wistfully recalling the bubble days. ‘We all said the smart card business was going to go like hell. And in a sense it did – go like hell, that is.’
Guillaumot joined Gemplus in 1998 as corporate controller after working at Arthur Andersen. Looking back, he admits there were reservations about the timing of the IPO. The company had no pressing need for capital, he explains, so the IPO could have waited until things improved.
The tech bubble helped create huge profits, says Guillaumot, but it forced the fundamentals into the shadows: corporate governance, management and, most importantly, the need for better business models.
But none of this rang true in late 2000. Not only was Gemplus the market leader in one of the most promising new technologies of the 1990s, competition in the smart card industry was almost nonexistent.
‘It was always the intention of the company to be IPO’ed – that was the intent of the founders,’ Guillaumot sighs. ‘The IPO wasn’t done to increase the level of cash. There were very few new entrants for the IPO. The idea was to make Gemplus more international; it was a bit of a marketing tool.’ For a French tech company with large overseas stakeholders, a listing on Nasdaq as well as on Euronext’s primary market had the potential to strengthen both its investment and corporate brands.
Guillaumot says the tech boom led many companies like Gemplus to ignore the need for solid business models in favor of growth. But some of the biggest difficulties lay as much within the confines of its own boardroom as they did in tumultuous telecoms market. In the months prior to the IPO, a US fund, the Texas Pacific Group (TGP), poured $500 mn into Gemplus in return for a 26.9 percent slice of the corporate cake. As losses started to mount in 2001, CEO Antonio Perez attempted some bold restructuring which pitched him against Marc Lassus, the company’s French founder and chairman.
The scene was set for a high-profile feud when details of Perez’s $97 mn options package emerged. ‘There was clearly a total lack of independence on our compensation committee, and not the necessary level of professionalism,’ admits Guillaumot.
In December 2001 TGP engineered a coup to oust both Lassus and Perez. It was an awful time, recalls Guillaumot, who was charged with the unenviable task of IR. Incredulous institutional investors could hardly believe what they read in the press. ‘They were a little puzzled,’ he says with understatement. ‘There was so much noise coming into the system.’
Enter Mandl
The September 2002 appointment of Alex Mandl, the former president and COO of AT&T, marked the beginning of Gemplus’s recovery. His arrival ended the most contentious boardroom issues and hastened a return to core business strategies. Today Gemplus is no longer on the defensive, which is reflected in its recovering share price.
But Mandl’s restructuring plans were almost thrown off by hostile press reports in France. The worry was that a power shift was taking place – away from France and toward the US. Even more disturbing were the sensational but unfounded allegations that Mandl was a CIA agent who was trying to steal smart card technology from France. It seems Mandl had been on the board of a CIA-funded venture capital fund, In-Q-Tel, and resigned upon joining Gemplus.
By now the jingoism has died down but it still irks Mandl: ‘I’m highly respectful of the French legacy of this company and of its founders. I’m also very respectful of the French resources we have and I don’t see that changing. However, my decisions are based not on nationality but on how we best position ourselves for opportunities.’
Mandl also offers an alternative perspective: ’93 percent of business is outside France, 70 percent of the shareholders aren’t French, we’re headquartered in Luxembourg, and the CEO isn’t French,’ he says, shrugging. ‘Some say that’s good, some say that’s bad.’
Despite the new boardroom stability, Gemplus still faces formidable challenges on the business front. The smart card market is growing but prices for low-memory cards are being driven down. This has led Mandl to declare that in some sectors of the market, smart cards are a commodity.
Mandl believes the only way to remain competitive is to adopt a twin strategy: developing high-end, high-value cards, while at the same time becoming a low-cost producer. His plans haven’t been realized without some hiccups along the way. For example, job-cutting measures resulted in a major strike in May.
More recently, Gemplus’s staunchest rival, SchlumbergerSema, confirmed what insiders have long suspected: the company’s smart card division is heading for an IPO of its own. Whether or not this happens will depend on how the market does in the near future.
That doesn’t worry Mandl: ‘I welcome it. It’s apples-to-apples so it will make quarterly comparisons more interesting. I think it will help us because it will highlight what the valuation should be – and we are of a higher value than where we’re at today.’
Indeed, while Gemplus stock has risen in 2003, it remains valued at not much more than the cash on its balance sheet. Guillaumot agrees SchlumbergerSema’s IPO will bring more industry information to the financial markets. ‘The more companies listed the more market interest there will be,’ he says. ‘But most importantly, it will show what the differentiators are between us and others.’
Guillaumot currently does all of Gemplus’s investor relations but he is planning to hire a full-time investor relations officer sometime this year. He refuses to speculate on what Gemplus’s shareholder structure may look like next year, but he does say that he’s certain investor relations will continue to develop in two key areas: disclosure and transparency.
He also foresees an even greater Anglo-Saxon following than at present. ‘Gemplus has focused on the domestic market, and now we are reasonably well covered by Paris analysts but not by those outside France,’ he explains. ‘Now that the company is stabilized it is time to look beyond France.’
Mid-range focus
As for the buy side, Gemplus focuses on large institutional investors, especially those with a 1-5 percent stake which are not related to the board. These are the investors who move the stock, says Guillaumot, whereas larger strategic investors are far more stable. ‘Having a shareholder base that feels good about the way things are going is fundamental,’ Mandl comments. ‘We always welcome new investors, but we’re not looking for them; we’re not raising new capital. We have a very strong balance sheet and a lot of cash.’
Guillaumot adds that the turmoil over the last two years allowed Gemplus to forge stronger links with its large shareholders.
For Gemplus, 2003 is the year for rebuilding. Already it can look back with satisfaction at the greater levels of transparency, more stable management team and strong governance that it has achieved in a short time.
The company also finds itself well prepared for the new standards of financial disclosure to be introduced in Europe by 2005. It already reports quarterly and has adopted international financial reporting standards (IFRS). And on the complicated business front, Gemplus is still making history: it recently sold its three billionth phone card.
Gemplus still hasn’t turned profitable, but its Q2 results confirm that operating losses are contained through cost-cutting efforts and productivity gains. Efforts are on track and according to plan, says Mandl, with contagious enthusiasm.
‘It’s a jewel, and I think we’ll build this into a very nifty business,’ he beams. ‘It’s not a slam dunk – nothing is and there are no guarantees. But I feel a lot better about it today than I did before.’
