Global Economics

Can New Bosses Fix Alcatel-Lucent?


Master telecom manager Verwaayen, abetted by French business savant Camus, already has a five-point plan to turn the equipment maker around

Ben Verwaayen's first morning in the job as the new chief executive of Alcatel-Lucent (ALU) 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 (BT) 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 (KPN.AS), 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 won't 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 (EAD.PA), 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 didn't 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's 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% 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 $1.7 billion quarterly loss, including a $1.3 billion writedown on its North American wireless business inherited from Lucent. Quarterly revenues were down 5.2% year-on-year, to $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 (BusinessWeek.com, 7/29/08). 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 haven't fared as miserably as Alcatel-Lucent (BusinessWeek, 6/18/08). Overall telecom investment worldwide is forecast to rise 2.5% to 5.5% 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're 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%. Shares traded in New York were off 4.69%, 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 isn't 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% 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.

Learning from Nokia

The former BT CEO said he has no plans to bring in his own team and did not call for more layoffs or an immediate corporate reorganization. He pointed out that although he quickly made changes at BT, he did not initiate a major reorg until he was four years into the job. Verwaayen also said he has no specific plans to kill off any of Alcatel's lines of business, saying only that the company will need to place increased importance on services, taking a similar approach to mobile handset giant Nokia (NOK) by becoming more of a software company. Like Nokia, Alcatel must continually tweak and improve its hardware, but it also must come up with compelling services.

Why take on what could be an extremely difficult turnaround, instead of relaxing after a long career? Verwaayen says he accepted the challenge because he was bored after three months of sitting around a swimming pool following his departure from BT. His wife guessed correctly, he said, when she observed that "I feel better in the office," Verwaayen said.

Indeed, Verwaayen said he had received lots of job offers over the past three months, including working for media companies and a variety of public-private initiatives. But he denied press reports that he initially turned down the offer to become Alcatel-Lucent's chief executive. "I never said no," he said, explaining instead that he gradually warmed to the idea in discussions with Camus during August.

"The most important thing for me was the choice of Philippe Camus" as chairman, Verwaayen says. "He understands the French environment, but he also really knows global business."

New Yorker at Heart

That experience was evident in Camus' tenure at EADS. Despite initial skepticism about their unusual power-sharing arrangement, Camus and Rainer Hertrich formed a smooth partnership—only to have it unravel after former Airbus boss Noël Forgeard used his connections to Jacques Chirac, who was France's president at the time, to oust Camus in 2005. In contrast to the easygoing Camus, Forgeard alienated the company's German leadership, sparking a management crisis after Airbus acknowledged delays on the A380 aircraft that cost the company billions. The two-headed management structure finally was scrapped last year (BusinessWeek.com, 7/16/07).

Compared with most French corporate executives, Camus has unusually strong ties to the U.S. He is a partner in Evercore Partners (EVR), a New York investment and advisory firm, and is co-managing partner of France's Groupe Lagardère (LAGA.PA), which has extensive U.S. media holdings, including such magazines as Elle and Road & Track. He said Sept. 2 that he will continue to live in New York and retain those posts while serving as Alcatel-Lucent's nonexecutive chairman.

Verwaayen said he and Camus had a series of "interesting conversations" over the past few weeks. "We talked about governance roles and responsibilities," he says. The two see eye-to-eye on the company's future direction and share a sense of humor, he said.

Nevertheless, it was only last Friday, Aug. 29, that Verwaayen finally decided to take the job. He made up his mind at his French vacation home in Luberon, near France's Rhône Valley, prior to leaving for a weekend in Scotland with BT's new chief executive, Ian Livingston, to watch a soccer match. Verwaayen flew back to France on Sunday to "to pick up a clean shirt" from his vacation home. He met with Alcatel-Lucent's board in Paris on Sept. 1. Until then, he said, he had visited the company's headquarters only once—as a member of the Lucent team that helped negotiate the merger—and didn't step foot in the building again until becoming CEO.

As Alcatel-Lucent's chief executive, Verwaayen will receive a yearly salary of €1.2 million ($1.75 million) plus substantial shares in the company and a target annual bonus of 150% of fixed salary. The payout can range from 0% to 200% of that target, based on yearly agreed performance criteria. But in a move likely to please shareholders, Verwaayen has agreed to no severance pay. "If they want to get rid of me, they can do it in a heartbeat," he said. "I am here to do a job, not to make a career." And if things don't work out? "I've still got my swimming suit," he said.

Business Exchange related topics:

Alcatel-Lucent

Telecom Industry

Wireless Communication

European Business


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