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Alcatel Rules Change Threatens Russo

Eighteen months after the merger, the board wants to change the two-thirds vote required to remove a CEO to a majority

Could a simple change in corporate bylaws lead to the ouster of Alcatel-Lucent (ALU) CEO Patricia Russo? At their annual meeting on May 30, shareholders of the world's largest telecommunication equipment maker will vote on a resolution that would allow the board to remove the CEO or chairman by a simple majority vote, instead of two-thirds as currently required.

The Paris company, formed by the 2006 merger of France's Alcatel and Lucent Technologies of the U.S., is characterizing the proposal as a housekeeping measure that will bring Alcatel-Lucent into alignment with corporate governance norms. But as the company has lurched from one dismal earnings announcement to the next, speculation has mounted about the future of Russo, Lucent's ex-CEO who runs the merged company. Former Alcatel boss Serge Tchuruk serves as nonexecutive chairman.

On Apr. 30 the company reported worse-than-expected first-quarter sales, down 0.5%, to $6 billion, and warned that full-year sales were likely to be down as well (, 5/1/08). In 2007 the company had revenues of $27.6 billion and a net loss of $5.39 billion. Alcatel-Lucent hasn't posted a quarterly profit since the merger became final on Dec. 1, 2006, and its shares have lost half their value since then. Although times are tough industrywide, Alcatel-Lucent's numbers are looking worse than most of its competitors'.

Fighting to Keep Her Job?

After the Apr. 30 announcement, Alcatel-Lucent's press department put out a flurry of calls to news organizations—including this one—offering interviews with Russo (, 5/8/08) something that had not been done in the past. That only stoked rumors the CEO was fighting to keep her job.

Against that backdrop, the proposed bylaws change looks ominous for Russo. Alcatel-Lucent said in a statement that the existing two-thirds majority rule, put in place at the time of the merger, was intended as a temporary measure "to enhance the stability of the senior management during the inevitably difficult transition period." But the provision was to have stayed in place for three years—and now the board likely will jettison it after only 18 months.

A spokesman explained the board decided that integration of the two companies had largely been completed. "After a dialogue with shareholders and investors, 18 months after the merger we felt it was time to return to standard corporate governance practices," he says. Most corporate boards require only a simple majority, not two-thirds.

Split Along Country Lines?

The company's 14-member board is carefully balanced, with six members drawn from Alcatel's former board and six from Lucent's. Two others are independent—Air France-KLM (AIRF.PA) Chairman Jean-Cyril Spinetta and Sylvia Jay, a former British government official who serves on the boards of several major French companies. But if France's power elite decides Russo needs to go, the balance could easily tip against her, with the two independent members joining the Alcatel camp.

The idea of a France-vs.-U.S. split isn't far-fetched. Industry watchers say the integration of Alcatel and Lucent has been painfully slow, with resentment on both sides. Indeed, a telecom executive who knows the company well says he doesn't believe Alcatel-Lucent's problems lie with technology—though it has some weak spots in its product line—or a broader telecom market slowdown. Rather, he says, the troubled trans-Atlantic merger has been stymied by cultural misunderstandings and turf battles.

Alcatel-Lucent would hardly be the first U.S.-European corporate tieup to fracture along geographic lines. Remember the ill-fated Daimler Chrysler (DAI) marriage? And at least that company's former boss, Jürgen Schrempp, spoke both English and German. Russo doesn't speak French.

Mass Defections Hurt Finances

The slow integration has taken a big financial toll. Some customers, uncertain about the merged company's product portfolio, have delayed purchases or defected to competitors such as Ericsson (ERIC), Nortel Networks (NT), or Cisco Systems (CSCO). That, along with an economic downturn that has dampened overall investment in telecom equipment, has sent revenues plunging. Alcatel-Lucent's competitiveness, in turn, has suffered because it has less money to invest in research and development—which leads to the loss of still more customers.

At the same time, a bunch of top executives have left the company in recent months, including its former chief operating officer, chief financial officer, chief administrative officer, and the head of its fast-growing services business. "The finances seem to be unraveling since the departure of the CFO," says Richard Windsor, a London-based analyst with Nomura Securities.

If Russo goes, who might get her job? In late April a French online business newsletter, La Lettre A, reported the company had already approached Ben Verwaayen, the well-regarded boss of British telco BT Group (BT) who is stepping down on May 31, about replacing Russo. But a source with knowledge of the matter tells BusinessWeek that the report is wrong and that the 56-year-old Dutchman, who was a top executive at Lucent before joining BT six years ago, has no intention of taking the top job at the merged company.

One thing seems certain, though. If the company's French board members orchestrate Russo's ouster, they'll be calling the shots on her replacement. "If there is a change in management, it will be very important for the new leader to be someone the French can respect," Windsor says.

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