Viva La Defense!

For relaxation, Denis Ranque navigates his 35-foot sailboat in all kinds of seas.

He can sure use the downtime. As chairman and CEO of Paris-based Thales, he's been steering a much larger ship from port to port. In just three short years, Ranque has radically transformed virtually every aspect of Thales. The end result: a much larger-and more profitable--company that's now a market leader in a number of high-tech niches with sales of $8.3 billion in 2000.

If you've never heard of Thales, you're not alone. The name is derived from Thales of Miletus (pronounced TAH-less), the first known Greek philosopher, scientist, and mathematician. He was the first to measure the accurate height of the pyramids and schoolchildren today still study his theorems in geometry. The company adopted his name and shed its ubiquitous former moniker--Thomson-CSF--as part of Ranque's plan to demonstrate how the company has changed during the three years he's been in charge. Thales is now the world's third-largest defense contractor, larger, in fact, than companies such as Northrop Grumman and BAE Systems, which are able to boast of instant name recognition.

While Ranque would love to see his company become a household name, right now he's more concerned with continuing his quest to build Thales into a global electronics contractor.

Ranque joined the company in 1983 and climbed the corporate ranks to the helm. When he took over company management in January 1998, Thales (then Thomson) was in the midst of a half-completed privatizanon process. His first task was to stay the course and complete the task initiated by his predecessors, which was taking longer than expected because of particular problems in France. "I didn't share anything within the company until we sorted out the privatization," says Ranque.

But that summer, with the process complete, Ranque realized that the company was still in need of a new focus. To compete in today's global trading arena, Thales needed to shed its insular French identity and venture abroad. "We have a small domestic market that has decreased and we've been forced to go outside," says Ranque. He soon started filling management ranks with non-French natives and revamping the corporate culture.

To boost sales outside of France, Thales entered into a series of JVs with local players. That gradual entry into new markets has become the hallmark of Ranque's operating style. Under his tutelage, Thales has entered several markets by buying a small stake or partnering with a domestic player. Over time, Thales has frequently ended up acquiring the partner, giving the company full access to domestic contracts.

This pattern of small local investment has often led to bigger things. By running a tiny local division in Australia, for instance, Thales was able to cultivate relationships with key industry contacts. By the time the Australian government decided to privatize its industrial defense arm, Thales was sufficiently entrenched to bid for the unit. "The government conducted a difficult test in which we had to apply to be the new owner," says Ranque. Thales ended up the winner, but "if we had not been there for about 10 years, I am not sure we would have won," he adds.

These days, Thales is moving at a faster clip. In late 1998, Thales entered into a JV with British defense concern Racal Electronics. A year later, Thales went on to acquire all of Racal, Britain's second-largest defense contractor after BAE Systems. The deal gave Thales instant heft-- and a more global presence to boot. As part of Thales, Racal got a stronger hand in its bid to unseat BAE's historical dominance of the UK market. And Ranque admitted to other benefits of the deal. He told London's The Daily Telegraph that "the acquisition of Racal is part of our American game plan. We want to build a bridge across the Atlantic, and we are now seen in Washington as a European, not just a French company."

Cracking the U.S. market has been a long-standing dream of European defense contractors. "U.S. defense is a world market and it would be nonsense to consider ourselves a global company and not be there," Ranque says. "It's such a dominant country in terms of defense technology and defense capability." He adds, however, "Defense businesses in the U.S. operate under special security rules which are different for genuine U.S. companies." Translation: only Americans need apply.

In a bid to buff its image in Washington, Thales has entered into a JV with Raytheon, the world's second-largest defense contractor. The venture is a bit of a two-headed hydra, with Raytheon overseeing the U.S. end of the business while Thales focuses on Europe.

The JV will assiduously avoid anything deemed too sensitive, such as the Stealth bomber. Instead, areas such as ground-based radar systems will get immediate priority. The JV has already inked a $1 billion contract to revamp NATO'S radar systems.

Ranque figures the Thales/Raytheon alliance should also boost his company's standing in other markets. He notes that many South American, Middle Eastern, and Asian customers prefer to allocate their defense dollars across both U.S. and European suppliers and crave balance. "I think a company that delivers a balanced solution and offers products that are 50 percent American and 50 percent European, would be a very, very strong plus," he says.

But it's fair to wonder if Thales will be hard-pressed to make further inroads in the U.S. market, given the historical skittishness in Washington. "There are always national security concerns, but we've seen some pretty amazing changes," says Paul Nisbet, an analyst with Newport, RI-based JSA Research. He points to BAE's purchase of a Lockheed Martin division as an example of the new style of thinking. But Nisbet adds that "there's more resistance to the French than the British." Ranque is quick to counter that Thales is not managed by the French government. "After privatization we moved the work force in France from 60,000 to half of that--which is not easy. At the same time, we moved the money we saved by hiring French jobs to buying foreign companies and creating jobs outside of France. That wouldn't have been done by a government-run company," he notes.

Though Thales historically buttered its bread with defense contracts (57 percent of sales), the company has also been branching out into two other areas: commercial aerospace (18 percent of sales) and IT (25 percent of sales). Part of Ranque's ongoing assessment of the company has been to refocus the organizational chart around these different groups. In 2000, he restructured Thales along three divisional lines (defense, avionics, IT). Each group has its own and needs to garner strong returns as a stand-alone unit. But Ranque acknowledges that all divisions are still part of the same company. "We're not a holding company...we play electronics in three different fields we believe are totally complementary. In reality I need to have my three businesses working together," says Ranque, who guards against any divisional drift by having the offices of the three division CEOs all on the same floor at the company's headquarters.

The commercial aerospace division is a logical extension of Thales' defense base. After all, if Thales is supplying electronics to jet fighters, why not do the same for commercial plane builders such as Airbus, Boeing, and Bombardier? And since the company already develops ground-based radar systems for the military, why not sell similar equipment to air traffic controllers trying to manage increasingly congested airports? HSBC's Charles Burrows thinks the aerospace division is making significant headway. "The growth at Airbus, a major customer, should bring significant economies of scale," he says.

Many of Thales' R&D efforts have also produced technology with other commercial applications. Like many defense contractors, Thales has now become a major player in the field of IT products and services--a role critics question. With the defense and aerospace divisions posting record profits and record backlogs, some openly wonder if Thales should shed the IT division and focus on its core strengths. "The division has a myriad of generally small activities that encompass areas away from the core expertise of the group. There is considerable potential for disappointment in this area, and therefore it absorbs a lot of management time," says Burrows. INC Barings' Francois Cespedes goes further, predicting that 75 percent of the subsidiaries in the IT division are likely to be sold in the longer term.

Ranque acknowledges that the IT division remains the wild card in the deck. "It's probably the most difficult because of the slowdown in telecom and tech markers," he says, but adds that "we're diversified and have no single dependency. For instance, we also make components for mobile communication and electronics for satellites, both of which are doing well."

In the meantime, Ranque is focused on boosting growth and profitability of the overall business. On that score, he's already done an impressive job. In 2000, sales rose 25 percent. And a close eye on costs helped operating profits surge 44 percent.

Yet HSBC's Burrows sees room for even more efficiency gains. "One could argue that the whole of Thales is ripe for margin expansion," he says. "Return on sales is below that of most of its peers,, particularly in the aerospace activities."

The outlook for Thales in 2001 is bright, thanks to a substantial backlog of unfilled orders that alone should boost operating profits an additional 20 percent this year and next, according to Deutsche Bank's Franck Bouvier. "The impact of the rationalization plan implemented in early 1999, coupled with tighter control of R&D costs, has undeniably had a positive effect," Bouvier wrote in a recent research report.

Looking ahead, Thales also stands to benefit from an increasing awareness in Europe of the need to upgrade military capabilities. During the recent skirmishes in Kosovo, many Europeans chafed at the notion that the U.S. was providing the bulk of the high-tech equipment. "It's clear that more money needs to be spent," says Ranque. "The good news is that the budgets have finally stopped shrinking...but we need more sophisticated platforms with increasing technology content." That, of course, would play right into Thales' high-tech focus.

Ranque has no intention of slowing down, but realizes that some of his goals must be progressive. "1 would not pretend that we have convinced everybody that we're no longer a French company, but we're on a good track for that."

And he is. Garnering more European defense sales, gaining access to the mighty U.S. market, and continually watching expenses will enable him to harbor a ship in every port in the years to come, teaching his goal of "making Thales a name everyone knows."

vital statistics

Denis RANQUE

CEO, Thales

"We should be considered truly American in America and truly European in Europe."

Age: 49

Birthplace: Marseille, France

Family: Married to wife Monique with five children

Education: France's Ecole Polytechnique, 1973-1976 and the Corps des Mines, 1983

Hobbies: Sailing

On being global: "It's extremely important in defense to be seen as a good citizen in the country in which we operate. And that takes time."