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McGinn: McGone

Light Reading
News Analysis
Light Reading
10/23/2000

Lucent Technologies Inc. (NYSE: LU) is ready to be rescued. Over the weekend, the board of directors ousted CEO Richard McGinn, installing board member Henry Schacht in his place as interim CEO.

Company officials also announced Lucent's fourth consecutive shortfall in earnings, reducing forecasts for the first quarter of 2001. The board has now set in motion the formal process of a corporate turnaround.

It won't be easy: Lucent's ongoing woes, including a mass exodus of talent and rapidly deflating financials, are considered symptomatic of a complicated set of underlying problems -- problems that point ultimately to the executive suite.

In fact, McGinn's departure is viewed as overdue by most analysts. "He tried to position the company's problems as having to do with leadership at the business unit level," says Christopher A. Nicoll, director at Current Analysis. "Now it's apparent the problems aren't as superficial as he would have liked people to believe."

In earlier attempts at reform, Lucent's group president of optical networking, Harry L. Bosco, resigned under pressure and was replaced by former Yurie Inc. CEO Jeong Kim and ex-head of Chromatis Networks Bob Barron (see Bosco To Go? and Lucent Shakes Up Optical Group). Now, it's clear that more was needed. "The problems didn't get better. Somebody has to pay," says Nicoll.

"Considering the damage done, it's amazing he's been able to stay around as long as he has," says Max Schuetz, optical networking analyst at Thomas Weisel Partners. "It's not easy to lose $150 billion in shareholder value and still keep your job."

Lucent's board has installed Henry Schacht, presently chairman of Avaya Inc. (NYSE: AV), the Lucent enterprise networking spinoff, as CEO. (He's leaving the Avaya chair, but will stay on the board.) Schacht is clearly an interim choice, however; he's going to help the board search for a new CEO. Lucent has called off its publicized search for a COO for the time being.

Schacht, 66, appears up to the job, at least for now, although he seems to have been trying to retire since 1995, when he left Cummins Engine Co. Inc. (NYSE: CUM) after 31 years on the job. He was called back to serve as Lucent CEO from 1995 to 1997, just after the company was launched on its own out of AT&T Corp. (NYSE: T). He handed the reins to McGinn shortly afterward, in 1997.

But most analysts say that even in the short term, Schacht and others at Lucent will have their hands full. "It's analogous with getting an oil tanker back on course," says Schuetz. It's not going to happen soon, he says.

A first step will be a return to basics. For one thing, Lucent needs to tighten up its ability to forecast.

"Cisco, for example, can close its books in a day," says Schuetz. "They can forecast sales, production, and inventory control processes. Lucent seems to have problems with that."

Schuetz gives an example of how Lucent's inability to accurately forecast its requirements has backfired. He points out that in recent earnings discussions, Corning Inc. (NYSE: GLW) maintained that its quarterly growth would have been 20 percent, not 15 percent, had Lucent used all of the components it had ordered from Corning. But Lucent had miscalculated its needs, and as a result, Corning was stuck with unsold parts.

Lucent seems aware that the road ahead won't be easy. Company officials issued reduced guidance for the first quarter of 2001, declaring that pro forma revenue from operations will be down about 7 percent and pro forma earnings per share from continuing operations would break even. Lucent is set to announce its Q4 2000 results today after the market closes.

After trading briefly in the red, Lucent's shares turned around and were trading up $1.19 (5.25 percent) to $23.81 by mid-morning.

-- Mary Jander, senior editor, Light Reading http://www.lightreading.com

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