The Real Lesson of the Lucent-Alcatel Affair

The fact that the deal didn't happen tells us plenty: Gaining access to customers now matters more than acquiring technology

By Stephen Baker

In hindsight, it just doesn't seem fair. For years, we in the media have been focusing on global hotshots like Nokia and Vodafone. And poor old Alcatel, sitting just a 10-minute walk from this Paris bureau, went virtually unnoticed.

Size wasn't the problem. Alcatel, with sales in 2000 of $28.2 billion, passed any girth test. Trouble was, in the markets that seemed to matter most -- the Internet, for example, and mobile phones -- Alcatel was an also-ran. Despite an impressive turnaround by CEO Serge Tchuruk, Alcatel lacked star power. Oh, it was viable, all right. The company earned fair-to-middling profits, gained some share in American markets. But still, what kind of story would that be? France's Alcatel: One Viable Company.

Then, in late May this hulking neighbor of ours made its unlikely move for greatness. In a chateau south of Paris, Tchuruk and his team negotiated to buy Lucent Technologies, the fallen American giant, for $24 billion. Suddenly the eternal also-ran was gunning for the top spot, or at least something close. Had we misread the company? Was this ordinary Clark Kent of a company going to flex hidden muscles and take off like Superman?

Turns out the answer was no. The Lucent deal fell through the evening of May 29, when the two sides failed to agree on who would control the combined company. And hours later, there was Tchuruk warning that profits would sink as Alcatel restructured yet again. The bills for this latest revamp would amount to $2.7 billion. Alcatel, it appeared, was heading back to its work-a-day struggle for viability.


  It was with sadness that we kissed a great story good-by. It promised wonderful dramatic elements: French-American cultural clashes, life-and-death struggles at Lucent (an American icon, no less), rip-roaring battles with Cisco and Nortel. This Alcatel-Lucent combination would have kept us busy for months, even years. But no. Now Alcatel, still a regional player (and a hurting one at that), limps off for another cure.

Even a failed deal like this one, though, shows us how the technology world is changing in this post dot-com era. The most important change? Here was a technology deal, one of the biggest of all time -- and the focus wasn't technology.

Let me explain. A year ago, technology was the force that promised to change the world. Tech leaders like Oracle's Larry Ellison, Tom Siebel of Siebel Systems or, most famously, Cisco Systems' CEO John Chambers, paid house calls to the leaders of blue-chip companies and scared the daylights out of them. They convinced the moguls that without the latest Internet systems, these blue chips might as well fold their tents.

The Net loomed like a giant storm, a force of nature, and the choice was to harness it or be swept away. This pitch transformed Cisco and others into titans in their own right. And Alcatel? Tchuruk's company joined the hunt for its share of that Net magic, spending some $17 billion on Internet companies in North America.


  But when Tchuruk was angling to buy Lucent, he wasn't after technology. Lucent's technology, in fact, is very similar to Alcatel's own. In today's fretful climate, the miracle machines that turned so many heads a year ago now whisper just as many broken promises. Tchuruk, in tune with this new tough-minded era, was hunting for a harder currency. He wanted Lucent's customers. Give me customers, big corporate customers, he was saying. Open the door for me at AT&T and Verizon Communications, and I'll come up with the technology to sell them.

This was a deal for the post dot-com age if there ever was one. Geography shone brighter than glittering new routers or 40 gigabit fiber. Alcatel had Europe. Lucent provided the United States, which alone accounted for 40% of the global telecommunications market. Sure, neither company was a picture of health, especially the faltering Lucent. But thanks to geography and size, this trans-Atlantic combination stood a chance to survive.

Before the deal collapsed, analysts were predicting that a wave of competitors would follow this trans-Atlantic lead. The thinking was that Nortel, for example, would need to beef up its European presence to battle Alcatel-Lucent. And Germany's Siemens would need a spot in the U.S. Maybe those two would join forces.


  Now, in the absence of an Alcatel-Lucent pairing, do telecom manufacturers still need to straddle oceans? Could be. Now that Tchuruk and Lucent's Henry Schacht have shown competitors that a trans-Atlantic giant is possible, don't be surprised if competitors start staking out positions. The big players include Nortel, Siemens, and Britain's Marconi. And to gain U.S. customers, Europeans could target a host of smaller U.S. companies, says Kenneth M. Leon, an analyst at ABM Amro in New York. He points to Redback Networks, Tellabs, and Advanced Fibre, which all have lots of customers -- the new currency of choice.

And of course, there's a chance that Lucent's efforts to go it alone will come up short. In that case, maybe even Lucent and Alcatel will hook up again. It still would make for a great story.

Baker covers technology from BusinessWeek's Paris bureau. Follow his Euro-Tech columns twice a month, only on BW Online

Edited by Douglas Harbrecht

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