Shakeup Should Let Alcatel Move on

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The resignations of Alcatel-Lucent's two top executives mark the final stage in a two-year-old merger that so far has failed to deliver strong results.

Chairman Serge Tchuruk will step down Oct. 1 and CEO Patricia Russo will leave by year's end after helping to pick her replacement, the company said Tuesday after reporting a large loss for the second quarter. Its board will also be trimmed down, and former Lucent CEO Henry Schacht will leave the board immediately.

The communications equipment makers joined forces in 2006 in a bid to gain economies of scale to better compete against low-cost Chinese vendors such as Huawei Technologies. The move also eliminated one more independent competitor vying to supply a dwindling number of service providers, following a string of big carrier mergers.

However, the trans-Atlantic deal caused jitters over culture clashes and future prospects from the beginning, winning approval from Lucent shareholders in a close vote. And since it was formed, Alcatel-Lucent has racked up a string of losses. On Tuesday, it posted a second-quarter loss of €1.1 billion (US$1.7 billion), up from €586 million a year earlier. Not counting exceptional charges, it still lost €222 million.

"When you take two people with broken legs and tie them together, they don't really walk any better," said Yankee Group analyst Zeus Kerravala. The deal was virtually doomed to failure, with two struggling partners, cultural differences to overcome, and dramatic changes at Alcatel-Lucent's carrier customers, he said.

But the resignations may clear the way for leaders who can deliver what carriers are now looking for, Kerravala believes. In the traditional telecommunications world where Russo and Tchuruk come from, vendors like Alcatel and Lucent built both networks and the software to deliver applications on them. Today, carriers such as BT Group and AT&T want a single IP (Internet Protocol) infrastructure that can carry applications and services developed by third parties, Kerravala said. They will be more like Windows, which gains its strength from its widespread developer base, he said.

The good news for Alcatel-Lucent is that no vendor quite has what the carriers need yet, Kerravala said, although Cisco and Juniper (which just hired former Microsoft executive Kevin Johnson as its CEO) are working on it. "It's not like it's too late for Alcatel-Lucent," he said.

The departures will finally consummate the deal and put the company in French hands, Burton Group analyst Dave Passmore said.

"It really was a takeover of Lucent by Alcatel. By putting her in charge, at least initially, it gave the Lucent people a reason to perhaps hang on," Passmore said, in reference to Russo. It was a hard merger, and culture clashes and a tough market have prevented the company from better competing against low-cost rivals. A recently reported move by Alcatel-Lucent to concentrate on services rather than equipment is one move to succeed in the new environment, he added.

Frank Dzubeck, an analyst at Communications Network Architects, agreed that cultural differences have stalled the company.

"It's not that the other party can't change. ... It's that neither party wants to change," Dzubeck said. "Neither organization thought this was a merger of equals."

Tchuruk and Russo are both talented leaders, but they have to make way for fresh leadership to do the hard work of cutting jobs and centralizing authority, he said.

"That's the only way that this thing was ever going to get solved," Dzubeck said.

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