Alcatel-Lucent: Fact and Fiction in Latest Stories

September 9, 2009

Alcatel-Lucent logo

This week, two stories about Alcatel-Lucent hit the business headlines. Both suggest further leadership challenges facing the organization. In each, it is hard to separate fact from creative fiction

Since the merger of American and French telecommunication firms, there have been a series of boardroom squabbles and upheavals in the merged organization.

Today [September 8th 2009], disturbing news over the AFL agency news-lines reported that five employees of French/American company had occupied its Italian factory at Battipaglia, near Naples, overnight and were threatening to set fire to themselves to protest restructuring at the plant

“They have jerry cans of petrol and are threatening to immolate themselves and set fire to the factory. They’re preventing anyone from getting in,” Giovanni Sgambati of the local branch of metal workers union UIL. [was quoted by News Agency AFP as saying]

He said the five employees of the telecommunications equipment giant entered the factory at Battipaglia, near Naples, overnight.

They want Alcatel-Lucent to abandon its plan to suspend production at the site,” where around 100 people work in research and another 100 in production, Sgambati said.

Alcatel-Lucent said in a statement that it was “managing the situation very attentively along with the local authorities. While we understand the concern of workers at Battipaglia, Alcatel-Lucent is working continuously with local authorities and employees’ representatives to ensure a lasting solution for the employees.”

Alcatel-Lucent, which employs around 2,000 people in Italy, announced several months ago its intention to restructure the Battipaglia factory by giving up production activities and keeping the research facilities. Italian Economic Development Minister Claudio Scajola has announced a meeting to discuss the matter Sept. 15.

The group has been through a long period of cuts and boardroom upheavals since the groups merged.

That alarming story did not have an immediate and violent end [as of September 9th 2009] and the longer term challenges to the company’s leaders regained the headlines.

The rationale for the 2006 takeover was the creation of effective competition for rival Chinese telecommunications accessory manufacturers Huawei and ZTE. But the hoped-for results had not followed the takeover, and rumours developed that a takeover was imminent.

It is not out of the question that the financial markets, especially Wall Street, are using a bit of creative license to promote stories and stock market bullishness.

Update [Sept 16th 2009]

The rumours and denials continue. Huawei’s denials fail to convince:

DALIAN, China (Reuters) – China’s Huawei HWT.UL, one of the world’s top makers of networking equipment, on Thursday denied a report it was in talks to form an alliance with Franco-American rival Alcatel-Lucent (ALUA.PA).

French magazine Challenges said the two companies had begun preliminary tie-up talks, envisioning making a certain number of products together, but had ruled out a merger.

Alcatel-Lucent shares rose slightly in Paris on Wednesday.

“The reports are inaccurate. Huawei is not in discussions with Alcatel-Lucent,” said Huawei spokesman Ross Gan. A spokeswoman for Alcatel-Lucent declined to comment to Reuters on Wednesday.

This is not the first time Huawei has scotched speculation of a linkup with Alcatel-Lucent.

Late last month, the Chinese company declared it had no plans to buy a stake in Alcatel-Lucent, two days after the latter’s stock surged 16 percent in a single session partly on market talk it could be bought by a Chinese rival.

There have been instances though where a Chinese company has said something and later done quite the opposite

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Alcatel-Lucent confronts its cross-cultural challenges

July 31, 2008
Alcatel-Lucent logo

Alcatel-Lucent logo

Alcatel-Lucent leaders step down a year after the Franco-American merger. Various difficulties have been cited by the board, including the cross-cultural challenges after the merger

The company announcement in Paris and New York put it as follows:

Alcatel-Lucent (Euronext Paris and NYSE: ALU) today announced changes to its leadership and Board of Directors. The company also announced its quarterly results and demonstrated improvements to its operational results for the third straight quarter. The Company reported that it is making steady progress on the strategy the company laid out last fall. To pave the way for a fully aligned governance and management model going forward, the company announced the following changes to its management team and Board of Directors:
Non-Executive Chairman Serge Tchuruk has decided to step down on October 1, 2008. CEO Pat Russo has decided to step down no later than the end of the year, and at the Board’s request will continue to run the company until a new CEO is in place to effect a smooth transition and maintain the continuity of the company’s business. The Board will commence a search for a new non-executive Chairman and CEO immediately.

Perhaps the most instructive phrase is the one about ‘paving the way for a fully aligned governance and management model’.

The financial side is starkly illustrated in Bloomberg’s report of the company’s sixth successive quarterly loss. [July 29th 2008]

(Bloomberg) — Alcatel-Lucent SA, the world’s largest supplier of fixed-line phone networks, said Chief Executive Officer Patricia Russo and Chairman Serge Tchuruk quit after the sixth straight quarterly loss. The second-quarter net loss widened to 1.1 billion euros from 586 million euros , a year earlier..

Russo and Tchuruk were the architects of Alcatel SA’s November 2006 purchase of Lucent Technologies Inc., creating a company that has never earned a profit, shed 62 percent of its market value and is eliminating 16,500 jobs. Russo, 56, hasn’t said when she expects the losses to end. She will step down by the end of the year, while Tchuruk, 70, will leave Oct 1.

The market conditions have been pretty bad since the merger. Competitors have also struggled for growth. But Alcatel-Lucent had added difficulties of achieving changes relating to the American and French cultures of the partners of the merger.

The technical issues were highlighted by Ovum

Alcatel-Lucent is riding multiple horses in the wireless infrastructure segment. Today, Alcatel-Lucent is the only Western vendor to offer or develop products for all wireless technologies (GSM, UMTS/HSPA, LTE, CDMA2000, WiMAX). The only other vendors doing so are Chinese companies ZTE and Huawei, but their cost structure and access to capital are more favorable than Alcatel-Lucent’s.

Scale is vital

In telecoms scale is vital. Without significant scale, profitability suffers. In that context, mergers are presented as the best means to create scale. However, simply adding more product lines does not create scale – the vendor must also go through a painful product rationalization process before reaping scale benefits. Product rationalization has an obvious R&D cost – the need to build a common platform – but it also has a marketing cost as the vendor needs to keep customers of discontinued platforms on board. In addition, competitors will try to benefit from any discontinuities and grab market share. This is what Ericsson and Huawei did last year at the expense of both Alcatel-Lucent and Nokia Siemens Networks.

The BBC has drawn attention to the cross-cultural difficulties post-merger.

‘Cultural divide’
“We hope that a new CEO will be able to bridge the cultural divide between the Americans and the French and get all sides pulling together,” said Richard Windsor from Nomura.

But the BBC article focused on a perceived divide between the two leaders who are departing.

Mergers mean trouble

For some years the business school wisdom is that mergers tend to be triumphs of hope over rationality. Leaders are only human, after all. It is also well-known that most marriages begin with both partners believing this is for ever…

That may be taken as a pretty cheap shot, and a weak metaphor. So let’s get more specific.

Business week a month ago [June 18th 2008] had also picked up on the marriage metaphor.

Alcatel-Lucent’s Troubled Marriage

Alcatel-Lucent (ALU) is in big trouble, and Russo is catching serious flak. In France, the 56-year-old executive is viewed with suspicion as the first American, and the first woman, to head a blue-chip French company. In the U.S., she’s vilified by many former employees of Lucent Technologies, where as CEO she oversaw a brutal downsizing before its merger with Paris-based Alcatel. All that is driving speculation that Russo may be headed out the door.
The marriage of these iconic companies was never going to be easy. True, Lucent’s U.S. strength in the wireless business nicely complemented Alcatel’s global footprint and its prowess in fixed-line and broadband. But the cultures could hardly have been more different. One was hierarchical and centrally controlled, the other entrepreneurial and flexible …What may surprise critics of France’s hidebound corporations is that Lucent was the rigid one.

Remember the EADS story?
There are structural parallels in this story the those at EADS (Airbus). Both companies suffer from the weakness of the dollar; whiffs of executive wrong-doings (in Costa Rica hanging over the one company, of insider-trading in the other); problems across cultures (remember the Airbus communications issues between Toulouse and Hamburg?).

Update

In the subsequent months, Alcatel Lucent was the subject of various stories suggesting it was a possible takeover target.