Post-Bubble Arrogance

Post-Bubble Arrogance – R. Scott Raynovich

December 4, 2002

5 Min Read
Post-Bubble Arrogance

The bubble, alas, is still alive at Lucent Corp.

Despite the fact that nearly two-thirds of the employees at this once world-class engineering company have lost their jobs in the past two years, an elite crew of board members and over-paid executives goes on functioning as if nothing has happened.

Yes, I'm talking about the news yesterday that Lucent Technologies Inc. (NYSE: LU) paid out millions of dollars in executive bonuses and actually gave its executives raises (see Lucent Fat Cats Gorge in 2002), as the company struggles to avoid bankruptcy and contemplates a reverse stock split that could run as high as 1 new share for every 40 that are traded in! What a deal!

Say you are a high-ranking executive at Lucent. Say you've seen the share price erode from a high of near $80 per share to its current plight under $2. Say you've heard the stories about grandma's 401K savings being wiped out by the implosion in her LU shares. Say you knew all about the aggressive vendor financing operations during the Richard McGinn (and Carly Fiorina) era, and did nothing. Say you signed off on multibillion-dollar acquisitions of companies run by insider cronies that amounted to zilch in shareholder value. Say you supervised the layoffs of tens of thousands of people. Say you look at the terrible balance sheet every day, and contemplate mounting losses in violation of the company's banking covenants. Can you, in good faith, accept a $4 million "bonus" for 2002, the year in which Lucent went into the toilet?

What would Alexander Graham Bell say about this?

The hard fact is: The fundamental cracks in Lucent's foundation have not been fixed. Until now, management has toyed with short-term, cosmetic fixes (see Lucent Silences SpringTide, Lucent Chops TMX 880, Lucent Clarifies Product Strategy. A patch here, a new bathroom fixture there, some trimming and pruning of the shrubbery in the Bell Labs gardens. Meanwhile, the floor joists and central beam are rotting. It is the core leadership of Lucent – its legacy protectionist board and slow-moving culture – that continue to drive this company toward oblivion.

In covering Lucent over the years, I've spoken to many former executives and investment partners who are intimately familiar with Lucent's problems. There is always a theme: Protectionist politics at the top – which line the pockets of an elite class of high-paid executives and protect the expensive but non-revenue producing internal university known as Bell Labs – rule the corporate culture. There is no room for young, dynamic leaders to move up the ranks. There is no place for revolutionary ideas to break out and form new product lines or divisions. The company is moved by a binary, cyclical management mindset, in which the only solutions are either "cut" or "pay."

"I am on the record that if Lucent doesn't fix its problems soon, they will be in bankruptcy within 12 months," says Tim Kraskey, a managing director at YankeeTek Ventures and former executive at Ascend Communications, which was acquired by Lucent in 1999 for the grotesquely overvalued sum of $20 billion. "There are no outsiders in that company; there have been no changes. What company do you know that has a university inside of it?"

But here's the real shocker. The Lucent board members think they've been right – and that they should still be board members. Imagine a situation in which you can wipe out $100 billion in shareholder equity and still keep your job! As I pointed out here in this space last January (see Lucent Stands Pat), there needs to be fundamental and profound change at Lucent, at the executive and the board level. Over the course of the last 12 months, virtually nothing has happened, other than the fact that the company has somewhat randomly lopped off another 20,000 jobs or so. (Keeping track of exactly how many people have been laid off is a full-time job within itself – but consider this: the company expects to have only 35,000 employees by the end of the year, down from an astounding 123,000 at its peak [see Lucent Loses $1 Billion, Plans Big Layoff]. But even that may not be enough to reach breakeven!). Bell Labs continues to be the largest Research & Development money pit in the Western Hemisphere. Consider this for a moment: According to the Bell Labs Web page, the division boasts 16,000 employees, which, according to the newest head-count targets, will account for nearly half the company's employees!

Certainly, there are some very hard-working and good people that remain at the company. I do not mean to disparage their work. Clearly, there are many viable product lines with established customer bases. But you need to invest in the sales and marketing of new product lines to survive, rather than spending all your money on the gadgets in the lab and installed base. Sadly, this may not matter anymore, as the board members and executives have gouged large enough holes in the company's balance sheet that there may be nothing that can save it.

It's so basic. Message to Lucent's board and executives: You work for the shareholders, not yourselves! Unfortunately, it's increasingly likely that shareholders will have their equity wiped clean. The monolithic, slow-as-molasses, cast-in-iron bureaucracy survives. And the Lucent board still doesn't get it. They've screwed up!

— R. Scott Raynovich, US Editor, Light Reading

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