Alcatel, Lucent Throw in the Towel

Alcatel SA (NYSE: ALA; Paris: CGEP:PA) and Lucent Technologies Inc. (NYSE: LU) have called off talks that had the industry buzzing for the last two weeks (see Lucent/Alcatel Rumors Fly).

In a prepared statement issued this afternoon, the two companies admitted they'd been discussing a merger but talks had ended. They declined to comment further.

Few observers seem surprised. Indeed, many seem relieved. "How could anyone think this was a good idea?" an executive with one startup that competes with both companies said anonymously today. "Neither company acquires well. There's a lot of conflict, a lot of serious overlap in product lines that could keep them snarled for years."

Despite appearances that the deal may have collapsed under the sheer weight of the complications involved, it's not clear just what really ended the talks. According to the Wall Street Journal, Lucent executives were put off by a reported lack of equal representation in the management and board of the proposed company.

The paper said terms reached over the weekend called for Alcatel to pay roughly $23.5 billion in stock, in which "Lucent shareholders would receive a fixed exchange ratio of 0.2435 of an Alcatel share for each Lucent share."

Separately, Reuters news service reported that Alcatel intended to form a new company, incorporated in France but headquartered at Lucent's present head offices in Murray Hill, N.J., with Alcatel CEO Serge Tchuruk taking the helm, at least initially. Reuters had the deal pegged at $32 billion.

But problems amongst executives weren't the only downsides seen for the proposed merger, which was a nearly universal turnoff on Wall Street and Main Street alike. Here are the main reasons for its unpopularity:

  • No shareholder value: "There would be some dilution to Alcatel shareholders, who will now own about 58 percent of the combined company," says Lawrence Harris, VP at Josephthal & Co.. Further, it's almost certain there would have been no premium to Lucent shareholders. The value of Lucent's pending completion of the spinoff of Agere Systems (NYSE: AGR) is already reflected in Lucent's share price, Harris says.

    Not surprisingly, shareholders of both companies gave a "thumbs down" to the proposed merger. By end of day Tuesday, Alcatel's share price fell 0.70 (2.49%) to 27.41. Lucent's shares were trading at 8.32, down 1.08 (11.49%).

  • Lucent's financial problems: Lucent agreed to pay its bankers $2.5 billion from "non-operational sources" in order to complete the Agere spinoff. It's already raised $519 million through overallotment on the Agere IPO. Originally, Lucent hoped to raise the balance by selling its Optical Fiber Solutions Group, which was the instigation point for the latest round of merger talks with Alcatel. In the event of a merger, the credit terms would have been reworked or the money would have had to come from the merger settlement.

  • Technology, product, and human resources overlap: Sources were quoted as saying the deal could realize up to $4 billion in savings from the elimination of duplication in these areas between Alcatel and Lucent.

    But that could have hit the U.S. hardest, sources say. "There could be tens of thousands of jobs lost there, since it's the area where there's the greatest overlap between Alcatel and Lucent," said one European analyst, who requested anonymity. He figured that up to 80 percent of the cuts contributing to crossover savings would come from the U.S.

In all, termination of the Alcatel/Lucent merger seems to have raised many questions, not all of them complimentary to either firm. It seems to rankle that the talks went on so long without official acknolwedgement other than selective "leaks" to key publications; that the proposed merger threatened so many jobs and so many products; and that in the end it all came to nought, reportedly over executive infighting.

"Whether or not you thought this was a good or bad idea to merge the firms, it is interesting to think about what has (for the moment) killed the deal... What mattered was the ego of Lucent executives," wrote one contributor to Light Reading's message board.

It remains to be seen whether Lucent will continue to seek outside buyers, and if so, what form a merger will take. Stay tuned.

- Mary Jander, Senior Editor, Light Reading
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thatsmrgeektoyou 12/4/2012 | 8:20:48 PM
re: Alcatel, Lucent Throw in the Towel The Motley Fool has the inside scoop on the secret correspondence between Lucent and Alcatel.

rafaelg 12/4/2012 | 8:20:54 PM
re: Alcatel, Lucent Throw in the Towel SWB,
Are you reading my mind? Well said. Although, I never saw 3 or four secretaries to one VP...

Maybe I was not high enough...
johnjohn 12/4/2012 | 8:20:54 PM
re: Alcatel, Lucent Throw in the Towel SoftwareBoy hit it right on. The monopolistic legacy of Lucent is the problem. For much more details, please read post 21.
ricainus 12/4/2012 | 8:20:56 PM
re: Alcatel, Lucent Throw in the Towel Let's not lay all the blame to oversized egos at Lucent. Alcatel is a company cut from the same cloth. They are the largest telecom supplier in Europe and became so by ... buying ITT! ITT was also known for sticking its ostrich head into the ground when it came to product development and an ossified management structure.

More so, there is the fact that the head of Alcatel is a headstrong individual by the name of Tchuruk, who comes out of the oil industry. Had he been required to run a renovated Lucent, I doubt he would have had the management talent to pull it off - unless he put in his own henchman in Murray Hill - just as the Germans have done at Chrysler. Even then, the results would not be guaranteed. (I suspect Lucent management had the Chrysler debacle very much in mind when negotiating with Alcatel.)

French management culture is one of control freaks. The hierarchy is everything and out of the box thinking is simply not on. I see nothing in the Alcatel management philosophy that would have bettered Lucent's chances.

Tchuruk has tried to change the management culture at Alcatel. For instance, English is the spoken language at its French HQ (yah, right), which Tchuruk removed from a dingy part of Paris to the prestigious Champs Elysees. (Talk about company perks..) These efforts are cosmetic and do not change one iota the fact that Tchuruk is micromanaging Alcatel.

So, what Lucent has escaped is not all that bad. Becoming an outpost for French management training in real-market games does not bring a lot of shareholder value. Tchuruk was looking for market share, but there is no evidence that Alcatel would have known any better than the current management what to do with it.

Besides, there is French media standoff between Tchuruk and a conglomerate executive by the name of JM Mesnier, who just bought Seagram's. So, the Alcatel-Lucent merger story has a slight smell of "can you top this?"

Lucent must change its management mentality, which has been to long that of the wooly haired mammoth. A better bet would be IBM, whose management seems a bit better at managing both its customers (plural, meaning more than one) and technological change in their industry.

I do not intentionally badger all of French industry. Aerospatial has humbled Boeing, Thomson has cornered the market share on hi-speed trains, France Telecom is a major telecom supplier (playing the role to Alcatel that ATT played to Lucent) and Air France is one of the few European airlines making a profit.

They may be control-freaks, but they also know how to go after markets. I simply think Alcatel was not up to managing Lucent, or any other American born and bred operating company. Not yet, anyway.

ramsu 12/4/2012 | 8:20:56 PM
re: Alcatel, Lucent Throw in the Towel Any pointers to a detailed breakdown of the revenue/profit contributions from the various businesses of the behemoth?

there are a few real good pockets of business still left there.
SoftwareBoy 12/4/2012 | 8:21:00 PM
re: Alcatel, Lucent Throw in the Towel Hmmm, a very interesting discussion on big company dynamics. Would make a great seminar. Just some random thoughts along those lines....

* Oil companies DO have to innovate, though granted not as rapidly at tech. Look at how gas stations have changed. Self serve, pay at the pump. These were major innovations. Look how almost every gas station now has a shop selling soda and donuts and what all. I'm certainly old enough to remember when it was not like that. You were lucky to find a few sticks of gum and stale candy bars. This is a big revenue source for the oil co's now. In effect, they have entered a whole new business: consumer retailing. THey also need to exploit new technologies for finding and extracting oil and gas, for refining it, etc. They do a LOT of basic research (anybody wanna be a chemist?). So they are not that different, yet somehow they seem to work better. I have some ExxonMobil stock and I get newsletters and such from them. They are constantly working toward things like fewer on the job injuries, less environmental impact, new chemicals to sell (they make a lot in that market), new retail innovations (Mobil's "speedpass") and so forth. They are actually quite dynamic, and they also seem to be able to consistently reduce costs while growing revenue. You could also look at GE. Has there ever been a more diversified company?

I think a big part of the problem with Lucent, Nortel, Alcatel is that they come from a monopoly background. There are many guys at Lucent that have been there since AT&T, and have never known another company. THey have lived in plush surroundings making way more money than they are worth. Why would they want to rock that boat? They live a life based on corporate largess, with perks aplently, fancy offices, two, three and four secretaries. That hardly stimulates daring thought.

For years the concept of "selling" at Lucent meant one thing: taking orders. There was no selling of any kind. The notion of product development meant one thing: what is AT&T going to ask us to make? No market savvy was needed. Hell, Lucent ceded the 10G optical space to Nortel by default because AT&T said it would never need a 10G product! Lucent HAD the 10G developed before anybody, but they were slaves to AT&T, and the stopped development based entirely on AT&Ts needs.

This kind of thinking is still there.

Bottom line is they have bad managers, at many levels. And no strong lines of responsibility. Look at the PathStar! That was a market-shaping product on paper. It was exactly what the CLECs needed, and many were sold on it. But they couldn't get the damn thing to work (helping to put some CLECs out of business in the process). Where is the responsibility? Who let things get to that pass?

And as always.... WHERE WAS MCGINN?????

You can go on and on. Look at the Navis products. Nothing but empty promises for years, missed deadlines. You can look through old Navis roadmaps and actually track how the release dates for products get pushed out six months every six months or so! It's incredible. And what happened there? The guys responsible were put in charge of all software within Lucent!

There is a gigantic wall between executives and the lower levels, through which nothing seems to filter. Product house Presidents talk across to each other, and up to higher level managers like Janet Davidson, who now seems to control about everything in Lucent that's not optical or services. They can spin whatever tales they want. Very little reality seeps through until its too late. They go on endless, high-budget executive circle jerks in fancy places, bitch to each other about nonsense like human resources and hiring five hundred more developers in India, but does Davidson ever slam someone to the floor and say something like "If Navis isn't rock solid and released by next month, you're fired"?

Nah. Incompetence gets promoted.

Well, this post is too long already. I'll stop now.
jmd 12/4/2012 | 8:21:01 PM
re: Alcatel, Lucent Throw in the Towel gardner wrote: GǣIf the organization of large companies is unproductive then why do they endure?Gǥ

Large companies are good at some things and bad at others. Both large and small companies are needed. Just like cooperation and competition are both good for some things and bad at others. WeGve got a system the takes the best from both. Sure there is a lot of inefficiencies but that happens. ThatGs evolution for ya.
seabizkit 12/4/2012 | 8:21:01 PM
re: Alcatel, Lucent Throw in the Towel Seemingly two Dinasours tango, don't they see extinction on the way. When Alcatel came into the US market with the ITT deal in the 80's and later with Lynch and Rockwell, they got market share. With Lucent's talent scrambling out, and Alcatel's talent fleeing as well, they might get one good company out the two...
fatchance 12/4/2012 | 8:21:04 PM
re: Alcatel, Lucent Throw in the Towel Actually in the early 1980's Chevron cut the product mix by 60%. There were too many niche/specialty products. They created multipurpose products and stopped making products that were not profitable. Inventory mix dropped and costs were cut, and they also cut headcount. Telecom isn't oil (a flow process business, starting with the same raw material)but some ideas can be carried over. The real problem is the rate of change of technology and the marketplace for telecom. You must move fast and make the right calls or you burn a ton of money. If you miss a cycle you lose market share.
gardner 12/4/2012 | 8:21:05 PM
re: Alcatel, Lucent Throw in the Towel

When was the last time an oil company killed off one of itGs own products?
Which product? Gasoline? Heating oil? Motor oil? These are relatively stable products unlike high tech products. You see, I think it is fairly straightforward for oil companies. They have a reduced set of well-understood products that can be incrementally improved without huge big disruption to everyday life. Just find the oil and the customer will buy it. I'm not sure high tech works that way.

The problem with large companies is that people instinctively defend their turf and in technology that hurts. ItGs better to spin-off innovation
or buy it. This is what VCs feed on.
Now the big question: Why does this keep happening? If the organization of large companies is unproductive then why do they endure? I tend to think that it isn't obvious what structure really works best. Maybe we haven't found one yet. Small entrepreneurial companies seldom stay that way. Look at Cisco. More importantly, I don't think that the major investment houses and the movers and shakers in the market really think that deep hierarchies are bad. It seems to be part of the common wisdom that past a certain size companies *have* to get deep hierarchies with all the turf wars and empire building that that implies. You don't hear a lot of criticism of deep hierarchies in Forbes or the Wall Street Journal. I don't hear a hue and cry anywhere for ending the layers and layers of executive VPs, senior VPs, VPs, assistant VPs, senior directors, directors, assistant directors, ad nauseum that populate a large multinational. Of course no one questioned Monarchy for thousands of years. It just seemed like the only way to organize a society of a certain size. Once you got past the hunter-gatherer tribal structure you had to go to princes, archdukes, kings and queens. Then all of a sudden (by the standards of how fast societies change) the common wisdom saw things differently. Are we at such a point now? It takes a certain number of people to create and maintain a complex product or a suite of complex products. I think the failures of a number of small Telecom startups may indicate that. I don't think 5 guys in a garage can't build a NEBS compliant, carrier class swiss army knife of a switch. But, neither do the large deeply hierarchy-bound multinationals seem to be able to thrive. I don't know of any that are doing well now. They are internally paralyzed by their organizational roadblocks and seem capable of some incredibly silly missteps (eg. the Lucatel debacle--that never would have been considered if anyone at the lower levels of the organization had been consulted on either side). What is it going to take for the business zeitgeist to change in the direction of less hierarchy? When is the WSJ or even Business Week going to declare the deep hierarchy dead? Every time we get a wave of entrepreneurial spirit people think it is over but then these same "best and brightest" drift toward the "chaotic attractor" of deep hierachical organization? Are we doomed to repeat these failures? What do people think about this?
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