Getting a Grip at Alcatel-Lucent

But getting a grip is exactly the impression Alcatel-Lucent CEO Patricia Russo wants to create as the telecom-equipment supplier revealed the outcome of an emergency review of its business this week.

Despite the communications glitches, Russo has succeeded but only to a degree.

On the plus side, Alcatel-Lucent spared investors another profit warning which made its third-quarter net loss slightly more palatable. Ericsson's profit warning and the firing of its CFO have also reminded investors that Alcatel-Lucent isn't the only company with troubles.
The departure of Jean-Pascal Beaufret as Alcatel-Lucent's CFO is significant in that he was the most senior executive at the company who'd been appointed by former CEO Serge Tchuruk. Alcatel-Lucent says he's going amicably but, to the extent the merger hasn't gone all that well so far, he has to take some of the blame.

Russo's selection of a smaller hand-picked executive team puts more distance between her and Tchuruk who remains chairman. The management shakeup should improve Alcatel-Lucent's agility in difficult market conditions.

The Franco-American company's other announcements -- 4,000 job cuts in addition to the 12,500 already planned and further trimming of Alcatel's marginally profitable carrier unit that provides networking kit to telecoms operators - respond to pressures for better alignment of costs with sales. Alcatel-Lucent reckons it has another €400 million in potential costs savings to go in addition to the €1.7 billion it's banked on until now.

But it all adds up to more of the same - an intensifying of the merger process. Rather than seeing Alcatel-Lucent achieve more with less, many investors would be happier if it tried to do less in the first place by, for example, exiting the weakest parts of its wireless business.

Indeed, Russo has warned that much of the immediate cost savings are going to find their way to customers rather than shareholders.

This all comes against a poor background for equipment suppliers in the short to medium term, particular for telecoms operators. They've been surprising the likes of Alcatel-Lucent with their ability to save on capex in the past couple of years. Citigroup estimates growth in capital spending by the world's 25 biggest operators will fall to 1.7 per cent in 2008 from 5.2 per cent in 2007 compared with 9 per cent in 2006 and 11 per cent in 2005.

There lies a glimmer of hope for Alcatel-Lucent. If a leaner, more profitable, company does emerge over the next 18 months, then it would have significant operational gearing for the next cyclical upswing in industry capex.

Whether Alcatel-Lucent will have the products and services to take full advantage of that after the distractions of its difficult merger remains to be seen. Its competitors like Cisco, emerging-market companies like China's Huawei and niche suppliers like Israel's Alvarion continue to muscle in on its territory.