Global Economics

Alcatel and Lucent: A Global Logic


Even as tens of thousands of young French protesters massed at Paris' Place de la République on Apr. 2 to denounce a new youth labor law aimed, in part, at helping France grapple with the challenge of globalization, a very different symbol of globalization was playing out just a few miles away. Behind the Beaux Arts façade of telecommunications equipment maker Alcatel (ALA), executives were putting the finishing touches on the company's $13.4 billion takeover of U.S. rival Lucent Technologies (LU) -- a deal that could create the world's largest communications-equipment company.

WORLD STAGE. There could hardly be a more potent example of globalization. Alcatel, which traces its roots to France's Compagnie Général d'Electricité, is assuming control of a crown jewel of U.S. technology: the former equipment arm of Ma Bell and home to the legendary Bell Labs, which invented the transistor.

But the truth is, both Alcatel and Lucent are already globe-spanning giants whose headquarters happen to be based, respectively, in Paris and New Jersey. Together, they operate in 130 countries. Indeed, it was Alcatel's strength in the U.S. that gave it the wherewithal to snap up Lucent.

Alcatel has long been the leading supplier of DSL broadband equipment to U.S. local phone companies, and it's quickly becoming a big player in fiber-to-the-home and Internet Protocol TV (IPTV). The company employs 9,000 people in North America, where it derived 15% of its $15.8 billion in 2005 revenue.

MADE IN HEAVEN? For its part, Lucent brings to the deal a leading position in conventional telecom switches and a top global market share in CDMA-type mobile networks. Both companies now get a growing share of their revenues from services, as well, and both are angling to deliver new Internet-based networks that can handle voice, data, video, and mobile traffic over a single backbone.

"A combined Alcatel and Lucent will be global in scale and have clear leadership in the areas that will define next-generation networks," said Alcatel chairman and CEO Serge Tchuruk in a statement announcing the merger.

Few analysts are dubious about the merits of a deal -- and many see the marriage of Alcatel and Lucent as a smart combination. The communications equipment industry is seeing fierce price pressure as its customers -- telecom operators such as AT&T (T) and Telefonica (TEF) -- merge into a shrinking pool. Plus, it faces growing competition from Chinese upstarts such as Huawei and ZTE. The combined Alcatel and Lucent will have about 88,000 employees, though it aims to cut 10% of those via streamlining and elimination of redundant jobs. Combined revenues of $25 billion will slightly top the $24.8 billion posted by networking giant Cisco Systems (CSCO) in its fiscal year ended last July.

"SIZE AND SCALE." Alcatel Chairman and CEO Serge Tchuruk, who was set to retire in May, will become the nonexecutive chairman of the new Paris-based company, whose name has not been announced. Lucent CEO Patricia Russo will be the CEO, and Alcatel COO and former heir-apparent for the top job, Mike Quigley, will remain as the combined companies' COO. "As we looked at this, there is no question this is an R&D issue," said Russo during a hastily-arranged conference call on Apr. 2. "Competition is increasing and size and scale really matter."

How did Alcatel manage to nab Lucent? Five years ago, Tchuruk came close to engineering a merger with Lucent, only to see it fall apart over power-sharing issues. In the intervening years, both companies struggled through the disastrous post-bubble telecom downturn.

Alcatel saw revenues plunge by more than 60%, from $37.7 billion in 2000 to $14.7 billion in 2004. During that time, it was forced to divest 62,000 employees, for a current total of 58,000. In 2005, Alcatel's revenues finally turned the corner, rising 7.4%, to $15.8 billion (see 3/24/06, "Lucent-Alcatel: A Marriage of Equals?").

STRATEGIC CHOICES. Lucent, hit by the same market forces, has cut 75,000 employees since 2000, and it saw sales fall from a peak of $28.9 billion in 2000 to a low of $8.5 billion in 2003. By last year, Lucent's sales recovered slightly to $9.4 billion (see BW Online, 1/16/06, "Dark Creeps Over Lucent").

In the end, though, Alcatel simply fared better. Tchuruk got rid of numerous troubled businesses, including microelectronics, batteries, cables, and mobile handsets. But he stubbornly refused calls from analysts to divest technologies such as fiber optics, which he was convinced were strategic to the company's future.

Tchuruk also stayed the course in mobile networks, where Alcatel is an also-ran globally, but enjoys big share in fast-growing developing economies. And one of his smartest moves was acquiring California start-up Timetra, whose hot Internet edge router has jumped to the No.2 market position, behind Cisco.

To address potential security concerns raised by the transatlantic merger, Lucent said it will spin off some defense and other top-secret work to a separate U.S.-based entity. Likewise, Alcatel is aiming to divest its European satellite operations to French company Thales, in which Alcatel holds a minority ownership.

FRENCH TRIUMPH. In the end, Alcatel's greater strength and product diversity carried the day. With Lucent, the company will now have a more powerful U.S. presence -- including entrée into big clients like Verizon Communications (VZ). At the same time, Lucent will be able to take its CDMA and services businesses to a broader global audience.

The kids enjoying a sunny rock concert-cum-protest at the Place de la République may not get it, but that's real globalization. Perhaps they should have been celebrating that one of their own country's marquee corporations will be leading the charge into next-generation communications.


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