Profitable growth delivers more shareholder value

This is how "Investir" introduces, on the front page of the June 12, 1999 issue, a curve showing that companies with a profitable growth gain more shareholder value than those focusing on reengineering and cost reduction.

The paper illustrated by this curve is very interesting. Based on a study of 350 French companies by Mercer Management Consulting, it analyses in depth the theme of shareholder value creation.

This investigation confirms the ideas exposed in my previous analysis "another strategy is possible" where I said that our Company could be reorganized, and its efficiency and profitability could be improved by other (also more efficient) ways than cost and staff reductions. That analysis was based on several studies performed in the United States.

Mercer’s investigation in France leads to similar conclusions:

"Analysis shows that over a 10-year period, companies practising "virtuous" growth gain much more value than those that focus on cost reduction to increase their profits. In fact, the market awards a bonus to firms that invest and buyout to extend their activity."

The paper also says: "If not all French companies have surrendered to the fashion of shrinking to their "hard-core" activities, this is also because investors still prefer developing businesses."

Growth is the only strategy capable of creating value over the long term, says Mercer’s vice-president, Hanna Moukanas, who emphasizes the necessity of external development (in an environment undergoing the trend of mondialisation) alongside organic growth, then concluding that profitable growth is the only strategy that can obtain a sustained value growth over a 10-year period.

Then the paper gives the names of companies that fall in the category of profitable-growth. As a matter of fact, Elf Aquitaine is listed, but at the end, behind Total, and its position, measured with the "shareholder value vs. shareholder’s equity" ratio, has deteriorated between 1997 and 1998 (falling from 2.12 to 1.79). To give us an idea of the meaning of the ratio, "Investir" writes: "Above 2.5, the market shows flawless confidence in the future of a company. Below 1.5, it shows signs of anxiety." This ratio could profitably complete the ROCE in our Company’s control panel.

In my speech of May 29, at the Shareholders General Meeting, I said in particular that:

"Creation of value is achieved much more efficiently by sustained profitable growth than by cost reduction and staff cutting. Many studies show that profitability obtained through development, and fishing for new businesses and new markets is better rewarded from a financial point of view and on the stock market. Of course this strategy is less easy than arbitrage and downsizing, as it requires imagination, invention and taking risks, though this is the most-rewarding strategy, and that creates the most long-term value.

This is the reason why Elf Aquitaine should enter with determination the way of sustained profitable growth. The Group can manage it. After having developed around three poles: hydrocarbons, chemicals, health, it is now retiring from the health activity and is thus in a position to implement a major acquisition.

In order to create value and achieve profitable growth, words are not enough, one must act with the intention to produce the effect. The way that human resources are to be spoilt at Elf EP does not appear like the right direction. Will the discussions and negotiations in progress between the Management and the Unions help return to a position more moderate and more respectful for the future? Let us hope so.

Elf’s word of thanks to the shareholders published in newspapers and magazines is not very convincing in terms of profitable growth. While the ad says "confidence in the profitable growth strategy that Elf has implemented since privatisation", the curve below the text shows a net result per share at 2.9 ? in 1999, rising to 4 ? in 1996, falling to 3.3 ? in 1997, then to 2.1 ? in 1998. In such conditions, how can one speak of profitable growth, above all when the net result per share applies to a smaller number of shares, due to a considerable number of share buy-backs.

Incantation is no action, and is not sufficient to create value and grow. Adequate and pertinent actions are also necessary, but actions that respect the personnel, which is the main asset of our Company. Let us hope that Elf Aquitaine will actually be on this way.

Bernard Butori, Paris, June 13, 1999