Hard Times at Alcatel-Lucent

Less than a year after CEO Patricia Russo took over, she's under a cloud because of a slew of problems, some of them inherited

Alcatel-Lucent (ALU) Chief Executive Patricia Russo is running out of time. Less than a year after she took the top job at the Paris telecom equipment maker, Alcatel is in free fall. The stock is cratering, sales are shriveling on both sides of the Atlantic, and the board is demanding answers, fast.

On Sept. 28, French business daily Les Echos reported that Alcatel-Lucent's board had called an emergency meeting on Sept. 20 and asked Russo to present a turnaround plan by Oct. 30. Shares rose more than 4% on the news—a measure of how desperate investors have become for a glimmer of potentially good news.

An Alcatel-Lucent spokesman, while declining to comment in detail on the report, said the company was "looking at ways to accelerate" previously announced restructuring plans, after issuing its third profit warning (BusinessWeek, 7/13/07) of the year on Sept. 13. "The company takes seriously the need to improve the financial performance of the business and is taking the necessary steps," he said.

Can Russo, the U.S.-born former boss of Lucent, pull the merged company out of this tailspin? Can she even hold onto her job?

Value of Merger Wiped Out

Already, some industry watchers are talking about jettisoning big parts of the company—and Russo herself. "There are serious questions about Pat's viability as CEO," says Richard Windsor, a London-based analyst for Nomura Securities. Alcatel's market capitalization has shrunk from more than $36 billion to $23 billion over the past year, wiping out any value added by its merger with Lucent.

There's growing consensus that the company will have to sell off its wireless business, including European operations formerly held by Alcatel, and U.S. holdings that once belonged to Lucent. Some analysts are calling for even more drastic steps. Per Lindberg of Dresdner Kleinwort in London says the company should sell Bell Labs—which it inherited from Lucent—while eliminating 30,000 jobs, more than twice the 12,000 layoffs that the company has already forecast.

To be sure, some of Russo's worst problems are not entirely of her own making. Alcatel-Lucent's GSM wireless business outside the U.S., mainly inherited from French precursor Alcatel, is hemorrhaging more than $1 billion a year in red ink as rivals such as Ericsson (ERIC) steal away market share. In the U.S. the company is suffering because major customers such as Verizon (VZ) are delaying buying new equipment.

Making a Fresh Start

But a decision made on Russo's watch—the recent acquisition of Nortel's next-generation wireless business—has compounded the problems in Europe, because integrating the new business has hampered Alcatel-Lucent's ability to fight off aggressive competitors. It now looks as if the company will have to sell off its wireless business—exiting Europe first, and later the U.S., where it uses CDMA technology, which is gradually being phased out there.

Alcatel-Lucent may be forced to replace Russo, analysts say, simply to reassure investors that it's serious about making a fresh start. Windsor suggests that Christian Reinaudo, head of Alcatel's northern European operations, could be promoted to CEO. Lindberg of Dresdner Kleinwort is pulling for Mike Quigley, a longtime Alcatel executive who recently left the company. Quigley had been considered heir apparent (BusinessWeek, 7/25/05) to former Alcatel CEO Serge Tchuruk before the 2006 merger propelled Russo into the job. Tchuruk became nonexecutive chairman.

For Russo—and for Tchuruk, the architect of this transatlantic merger gone horribly awry—the next few weeks are sure to be unpleasant.

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