Alcatel-Lucent Chops Away at Years of Failure

When Adolfo Hernandez joined Alcatel-Lucent (ALU) in late 2008, the networking-equipment maker was almost comically dysfunctional. In one of his first meetings as president of Europe, Africa, and the Middle East, a customer started screaming at him before he even got to his chair. At an all-hands gathering at an Eastern Europe facility, employees threw fruit and vegetables at executives announcing another round of restructuring. "The whistling was so loud that they couldn't hear themselves speak," Hernandez says. More than one of his new colleagues asked him why anyone in their right mind would take a job at such a screwed-up company.

Less than three years later—and after a decade of losses, downsizing, and one very large, messy merger—Alcatel-Lucent has become one of the most startling turnarounds in tech. The Paris-based company is gaining share in markets such as routers and superfast 4G networks, where it has won billion-dollar contracts with Verizon Wireless and Sprint Nextel (S). Telecom executives are buzzing about a new Rubik's Cube-sized gizmo called lightRadio that can extend wireless coverage without need of massive, energy-hogging cell towers. The stock has jumped 117 percent this year, to $6.40.

If the company proves its performance is no fluke when it announces quarterly earnings on May 5, the stock could more than double over time as oft-burned investors come back, says Tim Savageaux, an analyst with Terrapin Research. "The company has become super-relevant to its customers, but it's still almost completely irrelevant to the stock market," he says. "That's usually a good buying opportunity."

The main thing that went right, say analysts, customers, and executives such as Hernandez, was the arrival of Chief Executive Ben Verwaayen, who also came aboard in 2008. At the time of the merger in 2006, Alcatel was a sleepy French phone-equipment giant and Lucent, an AT&T (T) spinoff that includes the famed Bell Labs, was a near-bankrupt former darling of Wall Street. Instead of synergies, the deal resulted in endless "passport wars" among overlapping sales and product groups, so named because they often pitted French vs. U.S. teams. "There used to be a French part and a U.S. part, but Ben really integrated the company," says Eelco Blok, CEO of Dutch carrier Royal KPN.

Verwaayen, 59, was well aware of Alcatel-Lucent's problems. He was an executive at Lucent in its salad days, and later, as CEO of BT, a major customer. Although telecom suppliers flocked to his London office to get in on an overhaul of BT's network on his watch, he saw little innovation coming out of Alcatel-Lucent. "They had nothing to say to me," Verwaayen says. And yet he was still surprised at the depth of the chaos. On his first day on the job, he got an e-mail asking him to sign off on the hiring of a secretary for a Poland office, after 16 executives had already done so. "People had signed off who couldn't find Poland on a map," he says. He forwarded the e-mail to all employees, saying "This ends now. Hiring from now on is the responsibility of a manager and his or her boss."

Verwaayen made some larger decisions that had been put off too long. The company stopped hedging and bet correctly that a 4G wireless technology called LTE would emerge as the global standard instead of rival WiMax. Alcatel-Lucent makes wireless equipment found in cell towers and optical-networking gear—and those businesses are poised for growth as telecoms roll out 4G networks.

He also demanded that executives put aside parochial interests and come up with a strategy that spanned Alcatel's varied product lines. The process was led by Basil Alwan, a Silicon Valley-based executive who had managed the company's successful assault on the router business. Though routers are a basic building block of any network, Alwan's unit had been left alone by Alcatel-Lucent's warring tribes before Verwaayen joined. Since mid-2009, the routers have been integrated with other gear, letting carriers simplify and more easily manage their networks—say, by handling some jobs with a "blade" that slides into a router rather than buying a stand-alone piece of equipment. Alcatel-Lucent's share of routers sold to carriers grew from 12 percent in 2008 to 16 percent in 2010, and in the fourth quarter it passed Juniper Networks (JNPR) to become the No. 2 player after Cisco Systems (CSCO), according to research firm Infonetics.

In the past, carriers typically dealt with problems separately by, for example, stringing high-speed broadband lines to homes, or boosting cellular coverage. Now that consumers expect to get their YouTube videos and Yelp reviews whether they're watching TV, using a laptop, or pecking at their iPhone, wired and wireless are no longer different worlds. Alcatel-Lucent's position in both realms make it a contender for most contracts, says KPN's Blok. "They'll always be on the short list," he says.

Verwaayen's fiercest rival now may be Huawei, the networking giant in Shenzhen, China. Huawei has won business from some big Western carriers, including Vodafone Group (VOD) and Telstra, but has yet to crack the U.S. market where security concerns favor domestic and European suppliers such as Alcatel-Lucent. One remaining concern about Alcatel- Lucent is that it may be too dependent on demand from U.S. carriers, who happen to be in the midst of a buying binge to build out those 4G networks.

At least for now, there's little sign of fear about the threat from China. In part, that's because of a field trip Verwaayen and 30 Alcatel executives took to Shenzhen in 2010 at the invitation of Huawei founder Ren Zhengfei. The contingent came back from the two-day event emboldened; while they might never match Huawei on price, Huawei didn't have a Bell Labs to create the next lightRadio. And while he hasn't faced off against Huawei much in the U.S., Alcatel-Lucent Americas chief Robert Vrij says he's scoring wins in Latin America. "We're kicking some serious you-know-what," he told a packed room of smiling staffers at the company's Murray Hill, N.J., research lab in April. Maybe it was the bonuses he'd just announced or the rising stock price, but nobody threw tomatoes.

The bottom line: Alcatel-Lucent's stock price is up 117 percent in 2011, as a big bet on 4G wireless technology and innovative products starts to pay off.

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