news analysis Ben Verwaayen's first morning in the job as the new chief executive of Alcatel-Lucent on Sept. 2 provides a hint of how rapidly things are set to change at the troubled Paris-based maker of telecommunications equipment.
When Verwaayen asked for business cards, he was told they would take three days. Not good enough. He demanded--and got--them in three hours.
Verwaayen, 56, recently retired as CEO of British telecom giant BT Group after leading a solid turnaround that transformed the telco into a leader in broadband, Internet Protocol (IP), and IT services. A native of the Netherlands, Verwaayen previously ran the former Dutch national phone monopoly, then known as Royal PTT and now called KPN, helping it adjust to increased competition. He also served several years as the vice-chairman of Lucent before its merger with Alcatel.
Widely admired as a no-nonsense, quick-moving manager, Verwaayen will not be working alone to rescue Alcatel-Lucent. The company also announced a new chairman on Sept. 2, French business leader Philippe Camus, who is known for his political dexterity and deft touch with cross-border mergers. That skill will come in handy at Alcatel-Lucent, which has been rife with conflict between its former French and American units. Camus was a key architect of European Aeronautics Defence & Space, created by a Franco-German merger in 2000, and shared the post of CEO for five years with a German counterpart, Rainer Hertrich.
Daunting problems
Some analysts and investors are disappointed that the board did not tap Mike Quigley, a former Alcatel president, as chief executive. But many say that Verwaayen and Camus, with their respective experience in telecom and French business, come as close as possible to a dream team. The question is whether anyone can turn around the company.
Alcatel-Lucent has been hit hard by global economic uncertainty, tough competition from the likes of Chinese telecom equipment vendor Huawei Technologies, and weakness in parts of its product line. What is more, integrating the French and American halves of the company has proven far more challenging than anticipated, resulting in management and cultural conflicts. The result has been six consecutive quarters of losses and a decline of more than 50 percent in the company's market capitalization since the merger.
The latest financial results, issued July 29, underscore just how tough a job the new leadership team faces. Alcatel-Lucent posted a US$1.7 billion quarterly loss, including a US$1.3 billion writedown on its North American wireless business inherited from Lucent. Quarterly revenues were down 5.2 percent year-on-year, to US$6.5 billion, and the company warned that widening economic malaise in Europe could further dampen sales.
The company's dire results prompted CEO Patricia Russo and Chairman Serge Tchuruk to resign. Tchuruk steps down Oct. 1, but Russo is still occupying her seventh-floor office at the company's headquarters on Paris' rue Boétie. Verwaayen, a former colleague of Russo's at Lucent, is camping out in a conference room during the transition, which is expected to take several weeks.
Worse than others
No question, other telecom equipment makers face similar difficulties with the market, but they have not fared as miserably as Alcatel-Lucent.
Overall telecom investment worldwide is forecast to rise 2.5 percent to 5.5 percent this year, while Alcatel-Lucent predicts its sales will decline by low-to-mid single digits.
Verwaayen and Camus said during a press lunch Sept. 2 that they are both going into their new jobs with eyes wide open. "We have to resolve the profitability and do whatever is necessary to make this company compete better with competitors," Camus said. One unfortunately timed event underscored the challenges ahead: On Sept. 2, Alcatel-Lucent was dropped from the Dow Jones Euro Stoxx 50 index due to the decline in its market cap. That caused the stock to drop sharply on the Paris stock exchange--despite the announcement of new management--and it ended the day down 3.6 percent. Shares traded in New York were off 4.69 percent, finishing at 5.89.
Still, Verwaayen remains positive that the problems can be fixed. "I have looked hard at the assets, and I think I can do it," Verwaayen said in an exclusive interview with BusinessWeek.com. "The problem is at the top, and you can fix that."
Goodbye, wireless business?
Some analysts agree. Despite all the negative publicity Alcatel-Lucent has received in the past few years--and the fact that it is "not well run today", says Richard Windsor, an analyst at Nomura Securities--the company maintains world-leading positions in optics, DSL broadband, submarine cables, and CDMA-type wireless equipment. Windsor thinks Alcatel-Lucent should be able to bounce back, but it needs "fresh thinking". Given the current global economic climate, though, Alcatel-Lucent is not likely to improve its top line before 2009, at the earliest, he notes--meaning its share price may stay depressed.
To lift the company's fortunes, says analyst Thomas Langer of WestLB, Verwaayen may have to make some tough decisions and pull out of certain sectors, such as wireless, which currently accounts for a quarter of the company's sales. About half of that comes from systems conforming to the CDMA standard, a market forecast to decline 20 percent next year, Langer says. He is also skeptical of Alcatel-Lucent's proposed joint venture with NEC to share the research-and-development burden of fourth-generation mobile systems. Langer predicts that Alcatel will rebound, but as a smaller company focused on optics, fixed-line access, and transmission technologies.
Verwaayen's e-mail box and voicemail were crammed Sept. 2 with messages from people already giving him unsolicited advice his first day on the job. He declined to predict just when Alcatel-Lucent might return to profitability, but he outlined a broad, five-point program for turning the company around: delivering on benefits promised when the merger occurred; a greater embrace of so-called "open innovation" (an emerging management concept that aims to do away with the "not invented here" syndrome in corporate R&D); banishing the us-versus-them mentality inside Alcatel-Lucent by insisting that the company think and act as one; making executives accountable for results; and choosing the best people for positions, regardless of nationality.
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