Alcatel's U.S. Obsession

Lucent was an idol--now it's a target

It has long been Serge Tchuruk's American dream. When France's natty Mr. Fix-it arrived six years ago at the formerly state-owned hodgepodge of businesses known as Alcatel (ALA ), he knew a lot more about oil than fiber optics. But it didn't take Tchuruk long to single out one target, one vision of excellence, one symbol for everything France's Alcatel could ever be. It was a new spin-off from AT&T (T ) called Lucent Technologies Inc. (LU ) Early on, using Lucent as a benchmark didn't seem realistic around Alcatel's ramshackle headquarters in a gritty corner of Paris. Lucent was operating at the heart of America's Internet economy, and was a darling of Wall Street and the home of the legendary Bell Laboratories. If the global phone-equipment industry had a home address, it was Lucent's in Murray Hill, N.J.

Alcatel? It was a work in progress, at best. Tchuruk, whose first move when he arrived in 1995 was to announce a $5 billion loss, sold off scores of irrelevant business-es, from vineyards to nuclear power, to focus on telecommunications equipment. He nudged researchers toward the Internet, moved headquarters to more presentable digs near the Champs-Elysees. But catch up with high-flying Lucent? That was a stretch. And buying it? Not a chance.

Somebody go pinch Serge Tchuruk, because his American dream just may come true. The once-proud Lucent is now in trouble, a victim of botched management, bad bets, and the ice-cold U.S. tech economy. And it's a bottom-fishing Alcatel that's hurrying to Lucent's rescue. On May 22, in Paris and Murray Hill, the boards of both companies agreed to further consider Tchuruk's proposal: a $34 billion all-stock takeover.

Make no mistake: This is a combination born of weakness. Alcatel's an also-ran in the all-important U.S. market, and Lucent's sinking fast. Together, if this deal goes through, they have a chance to survive the coming shake-out. But riches or domination? They're a long way off.

Yet to Tchuruk, landing Lucent may be his only chance to be a major player in the U.S. Lucent, for all its troubles, provides a ticket to the U.S. market, which accounts for 40% of the global telecom market. For six years, Alcatel has struggled for a place in America and come up short. Now, instead of beating Lucent, Tchuruk's content to buy it and the access it brings.

Most U.S. phone companies stick to two vendors, usually an entrenched old-line supplier like Lucent or Nortel (NT ), and a friskier one with Net savvy--maybe Cisco (CSCO ), Juniper Systems (JNPR ), or Ciena (CIEN ). Alcatel, neither entrenched nor frisky, has only 22% of the market. The payoff of a deal with Lucent: a lucrative relationship with long-distance providers such as AT&T and regional giants like Verizon Communications, which alone controls 30% of local lines in the U.S.

There are other possibilities for Tchuruk in creating this $60 billion monster. Alcatel has 65% of the switching market in Europe, while Lucent has about a 50% share in the U.S. "That combination alone is really exciting. It would be very smart, if they can cut costs and rationalize it worldwide," says telecom equipment analyst Paul Johnson of Robertson Stephens.

TOO CHEAP? In the U.S., the combined company could bundle Lucent's switches with Alcatel's high-speed modems, which command 90% of the U.S. market. It would also make sense to combine their telephone switching and long-haul optical businesses. And the deal would resolve the burning issue of who will replace Chief Executive Henry B. Schacht, who came out of retirement to run the company last October after the board fired his protege, Richard A. McGinn.

The question in New Jersey is if Lucent is selling out too cheap. The stock, after all, is trawling near its historic low. The Alcatel offer provides new management and access to Alcatel's global customer base, but gives investors no premium at all. "If I were on the board," says Jeff Heil, director of equity investments for the Regents of the University of California, who sold 11 million shares of Lucent six weeks ago, "I would vote to bring in some new talent at the top and go it alone." If Lucent's board opts for this route--and analysts rate the chances 50-50--a host of new buyers could descend on the troubled company. These could range from Germany's Siemens to JDS Uniphase to Cisco Systems.

Though it's easy to see why Tchuruk is targeting Lucent, what a headache it would be to bring it all together. Tchuruk's team would be stretched to the limit not just to resurrect Lucent, but to merge two behemoths. "This would be the largest tech merger ever," says Lehman Brothers Inc. analyst Steve Levy. The fact that they're foreign to each other makes it far tougher. Even if Tchuruk pulls it off, he's left with a titan in telephone technologies--but a laggard in the Internet and wireless businesses dominated by Nortel, Cisco, Ericsson, and Nokia.

Of the two, Lucent is in far more dire shape. Its debt rating is one level above junk, and it would be bankrupt if it weren't raising cash by divesting valuable business units. The company lost $1.8 billion last quarter, and has no hope of turning a quarterly profit before next year. Its profit margins are a pathetic 17%--less than half that of industry rivals. Its stock has fallen 88% since hitting a high in December, 1999.

By comparison, the $27.6 billion Alcatel is faring just fine: At least it's still in the black, having eked out earnings of $184 million in the first quarter, despite gaping losses in cell phones. But Alcatel's relative health, paradoxically, is grounded in two weakness--its thinness in America and on the Net. Fact is, the U.S. tech distress has not yet crossed the Atlantic. It's thanks to this lag that Alcatel's market cap sits above Lucent's, $37 billion to $34 billion. What's more, Alcatel, which is still struggling to catch up in Internet technologies, suffered far less than rivals like Cisco from the dot-com implosion. This, along with his cleaner balance sheet, gives the 63-year-old Tchuruk the upper hand.

A bigger obstacle to Tchuruk nailing down a Lucent deal is more likely to be political than financial. Even the possibility of a deal in which the French take possession of Bell Labs is already stirring political resistance in the U.S. Congress. The labs, after all, are the direct descendant of Alexander Graham Bell's company that invented the laser and the transistor, and remain an American icon. Senator Robert G. Torricelli (D-N.J.) warns that concerns over foreign control of "sensitive technology" could kill the deal. Thus, Tchuruk may find it easier to buy Lucent without Bell Labs, a condition analysts say he is willing to accept. Why? He would win Lucent's treasured customers for an even lower price.

EVIL TWINS. Alcatel investors are certainly holding back their applause for the deal. Since news of the negotiations filtered into the press on May 18, Alcatel shares have slid 6%. The concern is that wrestling with the biggest tech merger ever could overtax Alcatel's management, including Tchuruk and his Texas-based chief operating officer, Krish Prabhu. And morale would likely sag. The two companies compete in 75% of their offerings. This means as much as $4 billion in savings--but thousands of job cuts. "All of us will have evil twins somewhere in the organization," predicts one Alcatel engineer in Paris.

At least the merged company will be a focused global player, which is far more than Alcatel could have hoped for in the mid-1990s. When Tchuruk arrived at the company, fresh from a successful turnaround at oil company TotalFina Elf, he found a sprawling empire extending over hundreds of businesses. For years, the company had overcharged the state phone company, France Télécom (FTE ), and then poured the proceeds into every nook and cranny of France's economy, from weekly magazines to Paris real estate.

Tchuruk, new to technology but an old hand in globalism, worked to focus the company in a hurry. To become a player in telecom, he needed Internet technology. Communications, after all, was moving from voice into data systems. The high-growth business, as Cisco was showing, consisted of revamping old voice networks for the digital age. This technology was a North American specialty. Tchuruk needed it, and his hunt for Internet riches led him in his uphill battle to transform Alcatel into a more American operation.

By the late '90s, Nortel and Lucent--under siege from Cisco--were spending billions to stake out their place on the Net. Nortel paid $7 billion for Bay Networks, Lucent spent $20 billion on Ascend Communications. Tchuruk joined the rush, spending $17 billion on a handful of companies including Xylan Corp., a networking company in Los Angeles, and Newbridge Networks Corp., a Canadian specialist in digital routers.

But the spate of deals taught Tchuruk a sobering lesson: The first instinct of American engineers, especially when dot-coms were still hot, was to run from a lumbering equipment maker--especially a European one. To hold on to his New Economy workforce, Tchuruk instituted radical changes for a French company. He pushed English as the corporate language, even at Paris headquarters. He gave the U.S. subsidiaries wide berth, and offered stock options. "We're not really a French company anymore," he said in a BusinessWeek interview last year.

For Serge Tchuruk, America is the promised land, and he's willing to risk a big battle to land his American prize. But even if he does pull off a Lucent deal, Tchuruk's work in the New World isn't going to get any easier.

By Stephen Baker in Paris and Steve Rosenbush in New York, with Andy Reinhardt in Paris

— With assistance by Andy Reinhardt

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE