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Optical/IP

Russo Should Go

Whew. Time Flies. This column takes me down memory lane. It's 2007 now. It's been about 10 months since Lucent no longer exists – it's now part of Alcatel-Lucent (NYSE: ALU) – but Chairman and CEO Pat Russo is still in charge of the transcontinental communications colossus. (See Farewell, Lucent.)

So far, the effect on the stock price appears to resemble that of gravity upon an apple.

Tuesday, I was perplexed by Alcatel's press statement. Everything's fine! Don't worry, shareholders! Pat's okay! (See AlcaLu Supports Russo). Grab another café creme! Three horribly missed quarters in a row is not enough, apparently.

In 2001, we famously called for a head at Lucent – of the McGinn variety – and shortly thereafter, it dropped. (See Lucent Supernova.) I've got a funny sense of déja vu. We're here again. What is it about the water in Murray Hill that leads its executives to new realms of shareholder value destruction?

Russo, it's time to go – back to the golf course. (See Pat Russo's Handicap.)

True, this marriage may have been doomed from the start. (See Alcatel Lucent Merger Under Fire.) Tying together a dysfunctional legacy telecom equipment outfit with a giant French bureaucracy never made sense to me. Throw in union issues, Lucent's pension problems, strange French employment laws, and the mystery of what to do with Bell Labs, and the whole thing looked like a boondoggle from the beginning.

But Russo made plenty of promises. In the spring of 2006, she started pounding the table about "synergies" and "cost savings." (See Alcatel, Lucent Seal Deal.)

This is what Russo said in April, 2006, when the merger was conceived: "This presents extraordinary opportunities for our combined company to accelerate its growth.”

Did she mean "decelerate"?

Amazingly, Russo is a serial overpromiser and apologist – both Lucent and Alcatel have been badly missing their numbers for at least the last year – and yet folks somehow still believe her. (See Lucent's Russo: Don't Panic!, Alcatel-Lucent Suffers Stock Shock , Alcatel-Lucent Suffers Q1 Slump, Alcatel-Lucent Slumps on Q2 Loss , and AlcaLu's Russo: We're Under Attack!)

But she blames the market. (See Losercatel?)

The fact is, it's not about the market, it's about execution. The merger has slowed down any momentum that Alcatel may have had in its strong suits, such as, say, the IP edge routing space. And it appears to have inherited Lucent's troubles:

Softswitching is a mess. The margins in wireless have collapsed. (See AlcaLu Breaks Down (in) 2006.) The big "IMS" hasn't really panned out. Popular, talented leaders are leaving the company at a critical time. (See Quigley, D'Amelio out at AlcaLu.) Worst of all, though, one of Lucent's former core markets, optical, has been lost. Ciena Corp. (NYSE: CIEN) is stealing their show in core optical. Look at Ciena and Infinera Corp. (Nasdaq: INFN) – do you see their stock prices going down?

We know the shareholders find it hard to muster enthusiasm for these dismal returns, and revolt is brewing. But the royalty of Murray Hill always knew how to put down a grass-roots rebellion. This skill appears to have translated overseas: Let them eat cake!

Poor Alcatel doesn't know what hit it – "Alors, Bell Labs, we can do something avec ça, non?" They'd never seen the Murray Hill effect in action.

Russo's had plenty of time. Years of broken promises are enough. Things aren't getting better. North America may be headed to recession. The glory days of selling mobile gear in China are over. Ericsson AB (Nasdaq: ERIC) is turning the screws.

The Alcatel-Lucent board owes it to shareholders to move on.

— R. Scott Raynovich, Editorial Director, Light Reading

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paolo.franzoi 12/5/2012 | 3:01:22 PM
re: Russo Should Go
I think you are on the right track Scott, but have not gone far enough. I look at IBMs turnaround. I think you need to get an executive from outside of telecom, to get to a clear, unbiased strategic view.

For example, if you REALLY wanted to become a router company why not buy Juniper? What attracted you to Lucent? I think the whole deal was a muddle strategically and will get much worse before it gets better. But a fish stinks from the head, and the head has to go.

seven
Scott Raynovich 12/5/2012 | 3:01:22 PM
re: Russo Should Go Stevery --

Good point. Maybe when Kevin Kennedy is done with JDSU...

--Scott
Stevery 12/5/2012 | 3:01:22 PM
re: Russo Should Go I (along with several others) had posted early that Pat was the wrong person at the helm. Hell, I think LU should have left her at Kodak. So major agreement on that point.

The part that I trip over: Who is her replacement? Who is adept enough with a chain saw to fix ALU? I don't think that either Alcatel or Lucent ever had to rethink the entire org, so there's not a lot of in-house restructuring talent. At least 2 layers need to go.

There is also not a deep bench of entrepreneurial talent. (Jeong Kim as head of Bell? Somebody who built a company on the gov't cheese economy? And you expect him to compete with the CSCO/SVstartup culture?)

Unless somebody figures out a decent solution, ALU will perpetually be an also-ran in the market place.
Pete Baldwin 12/5/2012 | 3:01:21 PM
re: Russo Should Go As long as we're at it, be sure to vote in our poll on Pat Russo:

http://www.lightreading.com/su...
metroman 12/5/2012 | 3:01:18 PM
re: Russo Should Go One key issue that will be at the hub of the restructuring in ALU is not only cultural Franco-US differences but also in employment laws.

ALA were very Europe heavy in people and LU US heavy. It is pretty easy to take people out in North America but in Europe (with France being one of the toughest nations) it is very tough to remove the kinds of numbers that they would like to do. The result is that you have far too many people in Europe. If you cut deep in North America to get the cost base down, you end up with a bigger problem of too few people in America and still far to many in Europe. They need to cut across the globe.

I am sure Pat took some time to get her head around this and still finds herself with the majority of her employees protected by socialist employment law. Good luck figuring it out while they take a few days off on strike.

Metroman
njguy 12/5/2012 | 3:01:17 PM
re: Russo Should Go "At least 2 layers need to go."

Management layers please. Both companies had been laying off the contributors for years. ALU is incredibly management heavy.
spelurker 12/5/2012 | 3:01:17 PM
re: Russo Should Go Reducing headcount is a red herring. That's the answer that Wall Street always likes, but it doesn't address the real problems. AlcaLu's problems are in execution. (Not in the Marie Antoinette meaning of the term ;)). LU has never been able to build a product and bring it to the market. Likewise, they've never been able to sell existing products into a market which had real competition. How many programs have they started, and then pulled the plug after a couple of years? How many products have they inherited or bought, but no one has ever seen deployed?
The first problem is due to political in-fighting and a lack of consistent vision. The second is an attitude problem. Russo epitomizes all of these flaws. Why would a combined entity be able to resolve these issues with her at the helm?

I can't really speak for the Alcatel portion, but for the LU part of the organization to survive, they need to remove the entire organization above the director level, including Pat, and start over.
delphi 12/5/2012 | 3:01:14 PM
re: Russo Should Go I have been commenting on the issue of leadership at Alca-Lu for a long time.

Pat is just another in a long line of Serge ego decisions. He was lucky that many of his decisions worked out during the go-go days in the late 90s to early 2000. He then had a guy in Mike Q who held the company together and even managed to grow during the bad years.

He jettisoned a proven winner for a proven loser in order to go for one last big bang before he rode off into the sunset.

The Board should strip him of his retirement and options. Little chance of this happening though.
net-hed 12/5/2012 | 3:01:11 PM
re: Russo Should Go Scott:

When you say Russo is a "serial overpromiser" with a record of "years of broken promises," are you talking about PAT Russo, winner of Light Reading's 2005 "Leading Light" award for demonstrating, more than any other public telecom CEO, "the greatest qualities of leadership, technological vision, and financial acumen"?
Scott Raynovich 12/5/2012 | 3:01:11 PM
re: Russo Should Go Yes I am, unfortunately. I guess she's let everybody down.

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