Worst of 2007: Alcatel-Lucent

It’s been a tough year for Patricia Russo.

The combination of France’s Alcatel and Lucent of the United States seems to have gotten lost in translation, at least in the short term. As a result, Alcatel-Lucent this year revised its financials downward, lost some top executives and reorganized its business units.

And everyone is wondering for how long the Alcatel-Lucent board will remain patient with CEO Pat Russo, who was expected to present a new business plan after the December issue went to print.

Just what went wrong with the $11 billion merger that closed early this year? The big picture is that Alcatel-Lucent hasn’t realized the savings it said would be gained by shedding duplicate products. That’s because major operators are spending less on capex and players like Huawei Technologies Co. Ltd. have become serious competitors across the globe, says Ron Westfall, research director, telecom infrastructure, access and applications, for Current Analysis Inc.

Companies including Ericsson and Nokia Siemens Networks are having troubles similar to Alcatel-Lucent, says Westfall. But, in Alcatel-Lucent’s case, executives should have done a better job anticipating that wireless operators are spending less on equipment, he says. “It was evident that Lucent’s mobile contracts and revenues weren’t able to sustain what had been generated in the previous quarters,” he says. “They had to have known going into the merger that this was not going to be a blip.”

No one really knew how much operators would cut down on spending, but when they did, all of Alcatel-Lucent suffered the effects, including the wireline and professional services groups, says Westfall.

Increased competition from overseas players didn’t help, either. Huawei, for example, has globalized its channels so well that it seriously can undercut companies like Alcatel-Lucent. In response, Ericsson, Nokia Siemens and others have fought back with “aggressive pricing tactics,” says Westfall, and that has hurt everyone’s margins, especially, it seems, Alcatel-Lucent’s.

The company this fall revised its financial outlook. It said full-year revenue growth likely will be flat, or maybe up slightly, as compared to 2006. Earlier this year, executives had predicted revenue growth in the mid-single digits.

Still, it might not be fair to judge Alcatel-Lucent on less than a year’s worth of performance. “It’s important to note that there was truly a three-year plan in place for the merger to realize the full benefits of the effort,” says Westfall. At press time, Alcatel-Lucent’s board seemed willing to continue supporting Russo. The company had just reported $459.7 million in third-quarter losses and announced 4,000 more job cuts as well as the departure of the company’s CFO. The industry had been awaiting Russo’s new business plan, one that analysts for UBS said would be the “key determinant” in her future at the company. Alcatel-Lucent did lose some top execs in late summer as it did what it called “organizational realignment,” an apparent move to tighten operations.

Observers generally approve of that belt-tightening. Westfall says Alcatel-Lucent could benefit from further “top-level streamlining.” UBS recommends the company drive wireless profitability. Among other initiatives, management must “make a bold move in wireless to consolidate R&D and platform development,” analysts wrote in an Oct. 16, 2007, memo to clients.

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