Analysis: Replacing leaders who led merger just a start

Alcatel-Lucent will soon get a makeover after announcing plans to replace its top executives, but investors should not expect miracles from the troubled French-American company.

The offspring of a cross-Atlantic merger in 2006, Alcatel-Lucent still faces hurdles as it seeks to lift sales and profit. Integration has not gone smoothly, new products have failed to stoke demand and competition remains as fierce as ever in the networking industry.

What's more, the new CEO will be confronted by a slowing global economy and further penny-pinching by large phone companies.

Yet the pending departures of Chief Executive Patricia Russo and Chairman Serge Tchuruk should give Alcatel-Lucent a chance to re-evaluate how it does business and ease the cultural and political obstacles to a major shakeup. Read full story.

Tchuruk, the Frenchman who used to run Alcatel, orchestrated the ill-fated merger against the opposition of many of the company's European shareholders. The vendor has racked up loss after loss Alcatel acquired an ailing Lucent in December 2006.

Russo, the former Lucent CEO who was given the job partly to limit U.S. opposition to the merger, never had many allies. Her elevation over former Alcatel President Mike Quigley alienated some insiders, while outside investors and analysts were calling for her departure just months after the deal was completed.

"You could practically see the pitchforks and torches a year ago with people calling for her head," said Dana Cooperson, a networking analyst at the technology advisory firm Ovum.

Identity crisis

One of the priorities of a new CEO, analysts say, is to figure out which markets and which products to concentrate on. Alcatel and Lucent have historically been all-service providers that strived to cater to every major market. The combined company has carried on that legacy.
In the hotly competitive equipment industry, however, it may no longer pay to be all things to all customers. Suppliers are under intense pressure to cut expenses and keep costs low. Maintaining a global flotilla of offices with sales and support staff is an expensive proposition.

Although Alcatel-Lucent made some cuts after the merger was completed two years ago, political sensitivity stemming from the cross-Atlantic nature of the deal delayed a deeper but necessary overhaul.

"First they did the pairing. Now they have to do the paring," said Michael Howard, principal analyst of the consulting firm Infonetics Research.

The change in leadership, he said, represents a "strong signal that they really mean business this time."

Industry upheaval

Pressure to keep costs down comes from other directions. Future growth opportunities, for instance, are more likely to be found in developing markets where customers cannot afford to spend as much as Western network operators.

In the U.S. and Europe, meanwhile, massive consolidation has created a handful of telecom giants that exert greater power than ever over suppliers. They can dictate prices, and if vendors such as Alcatel-Lucent refuse, carriers can turn to lower-cost rivals such as China's Huawei.

"Huawei has been happy to jump in and price low," Cooperson said.

If reorganizing the company and fending off cheaper suppliers isn't enough, the next Alcatel-Lucent CEO will also have to navigate a slowing global economy and seek new markets to exploit. Sales of products for the old circuit-switched technology are fading into history but demand for new products hasn't kept pace.

The merger was supposed to strengthen Alcatel's position in North America, give it a foothold in CDMA wireless technology and let the French firm tap Lucent's innovation in a promising market known as IMS (IP multimedia subsystems).

Instead, spending in North America has flattened out, CDMA sales are disappointing and IMS still hasn't take off.

"There was a lot of promise around IMS -- it was supposed to be the next big thing," said Zeus Kerravala of The Yankee Group, a market-research firm.

The good news? A slice of the historic Alcatel business, primarily optical networking, is still growing strongly, while Alcatel-Lucent's services division has expanded rapidly over the past few years.

The next CEO should also have greater support from the board. Three of the 19 members are already leaving; the size will be reduced and new directors will be added.

A reconfigured board should act with a more unified voice and perhaps reduce or eliminate political infighting between the Alcatel and Lucent factions.

Separating the company now is highly unlikely, analysts say, so the new CEO will have to figure out how to make the pieces of the puzzle fit. "It's a painful process," Cooperson noted.

Source:maketwatch