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
Page 1 / 5   >   >>
st0 12/5/2012 | 12:44:08 AM
re: Post-Bubble Arrogance Not sure why "lightreading" got such a negative impression of Bell lab. Agree, the transfer technology was never a strong suite for Bell lab. Nortel in the late 80 early 90s were follow the Bell lab research everywhere at conference, get their idea and develop product faster than AT&T... BNR (bell northern research) used to be BND (development) only because Bell lab did all the research for them (at the time, the IP is not that much guarded by lawyers. Remember the supper conductivity material invented by IBM got published without even patent protection? oh, I am really dated myself). NT got almost stalled after Bell sent out watch dog with the researchers at conference....
Bell lab was a treasure house, if you know how to apply the technology. It usually need a lot of work and time, (just like the transistor... it took many years to get into the radio). When the developing engineer notice the work, sometimes the researcher is already move on to the next best thing...It took a while to dig it all out and get transfered to development...(the busty late 90s was so short sighted and no body had time to do decent development...The middle link got broken even more at Lucent from my point of view...

It should point out, the Bell lab's glory got dimmed by early 90s break up of AT&T. Many went to NC university and UCSB... People jump back and forward between Lucent and AT&T, couldn't make their mind which one would be the best for their research...it was really hurt by the Gov decision. Some of good team got break up...VERY SAD...

.I bet if you turn all the Bell Lab IP loose, you will get French, Japanese, Chinese, even NT jump on it to make your head spin.... It is sad to see a treasure house got trashed in public like this and the board just added the insult (icing on the cake in the face).

my 2 cents.

- st (I am not lab rat in Bell lab, I wish I could join them in my youth)
gea 12/4/2012 | 9:15:02 PM
re: Post-Bubble Arrogance ...then these bonuses should have been delayed simply to avoid the appearence of extreme out-of-it-ness. In terms of just being a message, its an absurd and completely inappropriate one to send to the market right now.

"Say you signed off on multibillion-dollar acquisitions of companies run by insider cronies that amounted to zilch in shareholder value."

Don't forget that some of these acquisitions were of companies building a competitor to products Lucent was developing internally at the time (Chromatis, which McGuinn was on the board of). By signing-off on these acquisitions these "leaders" were either saying their own product/development/marketing intelligence sucked, or else that they were downright corrupt.


Preach it, Rayno!
solver 12/4/2012 | 9:14:59 PM
re: Post-Bubble Arrogance Yet Again, you are preaching to the choire.
I can honestly say that I haven't met a non-executive Lucent employee who doesn't detest what the leadership is doing to the company. The executives all know it too, but they are too busy lining their own pockets with the last few pennies of the company to talk publicly..

The question is how do we make real changes at the top without resorting to conspiracy to murder.
We should use this space to brainstorm about how to oust the Henry/Pat and their cronies.
What if each of us email a story of insanity to WSJ/NYT, and even to the Star Ledger?
Maybe a letter signing campaign of all employees?
douggreen 12/4/2012 | 9:14:56 PM
re: Post-Bubble Arrogance Gea,

Not to disagree with your conclusions (quite the contrary), but to state the facts:

McGinn was not on the board of Chromatis. You may be thinking of Morey Ejabat, although I'm not sure he would have been considered a "Lucent Insider". Morey was the only board member who was not an investor or founder.

Lucent bought Chromatis for the same reason that Sycamore bought Sirocco and Ciena bought Cyras, i.e. to copy Cisco's success with the Cerent aquisition for next gen SONET. Obviously none have been very succesful.
gea 12/4/2012 | 9:14:53 PM
re: Post-Bubble Arrogance douggreen:

Yeah, but wasn't McGuinn in a compromised position with respect to Chromatis? I thought I distinctly remembered that he had been given a large number of shares prior to the Lucent acquisition.
lightmaster 12/4/2012 | 9:14:50 PM
re: Post-Bubble Arrogance McGinn was not given a large amount of shares as far as I remember. I can't give you any inside information, but this is easy to verify as Lucent listed all of the major stockholders when they registered the stock after the aquisition (in SEC filings).

I don't remember McGinn being listed at all, and I think I would remember. Several prominant execs at Qwest, however (including Joe Nachio), were amoung those listed.
digerato 12/4/2012 | 9:14:47 PM
re: Post-Bubble Arrogance The word from former Lucent people is that Not Invented at Bell Labs (NIBL) reigns today -- i.e. anything that was developed outside the 5E group (e.g. the softswitching stuff) or acquired to clean up after hopeless Bell Labs-invented stuff (e.g. CBX ATM switches from Cascade/Ascend) is for the chop. That'll leave them with the 5E and all the other gold-plated voice switching stuff selling into a market where there is no more growth in capacity, only spares and repairs.

Alcatel offered to come in and clean up the house, but the xenophobes popped out of the woodwork and brayed about how a foreign take-over would be so damaging. Not as damaging as the entire company going bust, of course... but then you can justify almost anything in the name of national security in the US today.

Alcatel made a lucky escape, I think.


douggreen 12/4/2012 | 9:14:45 PM
re: Post-Bubble Arrogance Gea,

Lightmaster is correct...

Look on the Lucent website, investor section, SEC filings. Look for an S-3 filed on 7/28/2000. It lists all of the major stockholders of Chromatis as of the aquisition. McGinn's name is not listed.
dbostan 12/4/2012 | 9:14:28 PM
re: Post-Bubble Arrogance Unfortunately, Lucent is THE poster child of corporate America.
Richard Hatch 12/4/2012 | 9:14:24 PM
re: Post-Bubble Arrogance The BoD seems to be a group of insiders, a failed CEO, and professional director hacks. Write them. If they are deluged with hundreds of letters, they will be forced to pay attention. Only costs you 37 cents each.

Attend the next annual meeting. Last year's was Feb 20th. Usually ordinary shareholders get a chance to publicly ask questions of management (and can skewer them).

If you're not too cynical, these are 2 options.
Page 1 / 5   >   >>
Sign In