The battered old stalwarts of the mobile industry keep pulling rabbits out of hats ‘ just as we were surprised when Motorola managed to secure such a good catch as Qualcomm’s Sanjay Jha to head up its Devices business, so Alcatel-Lucent has now, against the odds, secured its dream CEO candidate, in the shape of former British Telecom chief Ben Verwaayen.
Verwaayen was much mentioned when Alcatel-Lucent announced that, following 18 months of post-merger difficulties and poor quarters, its management team of CEO Pat Russo and chairman Serge Tchuruk would step down. However, it was widely believed that he had turned down the post that many see as a poison chalice ‘ given the expected general downturn in the telecoms business, combined with recent performance by ALU that has trailed that of its similarly pressurized rivals, weighed down by Lucent’s over-dependence on the declining CDMA.
Russo had shown many strengths while at the helm of Lucent, and we believe ALU’s problems owe more to endemic weaknesses within the company and its particular combination of markets, than to her poor leadership. So this will not be an easy turnaround, where a strong CEO can take over from a weak one and immediately inject a confidence boost. There are some changes at ALU, notably a growing success in services, that a new leader will be able to build upon quickly, but in general the task will be a tough and long one.
If anyone is up to the task, Verwaayen must be that person. He is a European through and through, via his Dutch nationality and spell at BT, and together with incoming ALU non-executive chairman Philippe Camus will bring that empathy for the deeply European culture and business approach of Alcatel that Russo, for all her best efforts and move to Paris, did not achieve. Indeed, the charade that ALU was a merger of equals, and a genuinely Franco-American creation, has been destroyed ‘ even the Wall Street Journal has taken to calling the combined company just Alcatel on many occasions, indicating the whitewashing out of the US element, always the junior partner and now increasingly seen as the source of most of ALU’s problems. Yet with an exquisite balance, Verwaayen has also lived and worked in the US and spent five years at Lucent itself, just before moving to BT in 2001, so will not be oblivious to the heritage of that firm. While at Lucent, he championed a merger with Alcatel, and apparently saw himself in the CEO role, but was overruled by then-chairman Henry Schacht, who appointed Russo (and resigned from the ALU board on the announcement that she would depart after a brief transition period with the new CEO).
Most impressively for depressed ALU shareholders, the new CEO has a good track record in the type of situation in which they find themselves. He effected a major turnaround at BT, which a decade and more after privatization was still behaving like a combination of a cumbersome, state-run bureaucracy and a gentleman’s club. He transformed not just the financial results but the culture and strategy, turning BT into a firm that was perceived round the world to be cutting edge in the move to all-IP networks, to multimedia services and to international scope.
With six successive quarters of losses behind it, ALU, of course, has very different problems. A new broom may have greater freedom to make some radical decisions ‘ perhaps accelerating the shift towards services, perhaps reorganizing the CDMA activities, now under intense pressure from the Chinese vendors and market decline. But there is no really clear magic bullet, and the markets are not expecting one ‘ even on the announcement, which at the very least will end the uncertainty that has hung over ALU since Russo announced she would leave two months ago, ALU’s share price fell by 1.6% to €4.24 (47% down from the same time last year, though 10% up on a month ago).
While most analysts were positive about Verwaayen’s appointment, some were disappointed that last week’s rumors that Mike Quigley, a much respected former Alcatel executive, would return. Meanwhile, the new chairman is Philippe Camus, formerly co-CEO of aerospace group EADS, the parent of Airbus, and an expert in handling cultural rivalries within multinational ventures. He is currently managing partner of US investment bank Evercore Partners, and is largely based in the US, and he will retain that position as well as his Co-CEO role at French media player Lagard’re.
Whatever the undoubted qualities of the new management team, the biggest problems at ALU go beyond individual executives. Verwaayen and Camus should be able to present a more united management front than their predecessors and distance themselves from the legacies and personal intrigues of the former Alcatel and Lucent. But in reality, two major problems are dogging the giant venture ‘ the weak dollar, for a company that bills half its revenues in dollars or related currencies but reports in (strong) euros; and the decline of the CDMA business. Clearly the former is not something any management could influence, though ALU does seem to have weathered the storm worse than its major rivals, NSN and Ericsson, both European too, and with Ericsson having an greater exposure to the dollar, at 58%, and with the Swedish kronor on a similar trajectory to the euro.)
Reporting its sixth consecutive quarter of losses in July, during which period the merged company had halved in value, ALU highlighted its other albatross, CDMA, and the factor that makes many observers believe the French partner drastically overpaid for Lucent in 2006. Even before the merger was finalized, there were murmurs of discontent. Although Alcatel had offered no premium to Lucent shareholders in the terms of its ‘acquisition posing as a merger’, some investors voiced doubts that the US company would bring sufficient value to the deal, largely because of fears over the long term growth of its CDMA business, plus the short term impact of its pension arrangements. Analysts claimed that, while Lucent shareholders would get about 39% of the shares of the merged company, the US firm would not bring that much in terms of income and sales. If Lucent’s earnings gains from pensions funds were excluded from its figures, only 19% of combined operating income came from Lucent in mid-2006, once currency differences were resolved, and one-time items discounted.
In its statements in July 2008, ALU said: ‘CDMA activity declined at a higher pace than the company had planned. This was due, to a large extent, to a strong reduction in the capital expenditure of a key customer in North America. Although there are new opportunities in other geographic areas, the uncertainty regarding spending in North America has led the company to take more cautious midterm assumptions in this activity.’ This setback led to a non-cash impairment charge of €810m ($1.28bn) against the CDMA business, which was also written down in the fourth quarter of last year. That charge pushed AlcaLu’s net loss for the second quarter to €1.1bn ($1.73bn), or €0.49 per share. Excluding that writedown, and some smaller charges related to the ongoing Alcatel/Lucent merger process, the company’s second quarter adjusted net loss was €222m ($349m), or €0.10 per share. Revenues were €4.1bn ($6.45bn), down 5.2% year-on-year. With a constant dollar:euro currency rate over last year, revenues would have grown 1.7%, but the carrier business would still have suffered a 3% decline, while in real terms, this unit saw a 9.4% drop to €2.8bn ($4.4bn).