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How Lucent Fell

Failure to shake off Ma Bell-like habits put it on the road to merger with AlcatelMurray Hill

In unveiling plans to merge with France’s Alcatel last week, Lucent Technologies all but completed its short and largely unhappy life as an independent company. Spun out from AT&T in 1996, the telecom equipment maker flashed like a supernova into Wall Street prominence, only to collapse into the black hole of losses and layoffs.

The Murray Hill-based company that Alcatel agreed to acquire for $13.5 billion has shrunk from a workforce of 157,000 in 2000 to some 30,200 today, including about 6,400 in New Jersey. Lucent will slash more jobs as a result of the buyout. The merger partners plan to cut 10% of a combined payroll that currently totals 88,000 employees.

As dramatic as Lucent’s downsizing has been, the cratering of its stock has been as painful. From a high of $84 a share, it plunged to less than $1 when the telecom bubble burst, wiping out the 401(k) nest eggs of myriad employees. By that measure, the price of $3.01-a-share that the merger was valued at when the deal was announced represented a healthy rebound.

Under terms of the agreement, the combined company will be based in Paris and run by Lucent CEO Pat Russo, who has vowed to brush up on her high school French. A no-nonsense cost-cutter, Russo eliminated tens of thousands of Lucent jobs after taking command in 2002 and steering the company back to profitability; it earned some $1.2 billion last year.

“The chief problem with Lucent was that after its spinoff from AT&T, the company positioned itself as a provider to the Baby Bells and other telecom service providers across the nation and internationally,” says Narain Gehani, chairman of the computer science department at Newark’s New Jersey Institute of Technology.

“But that market grew smaller as telecom companies continued to merge, and equipment purchases kept shrinking,” says Gehani, who worked at Lucent’s Bell Labs division for 13 years and wrote a book about it called “Bell Labs: Life in the Crown Jewel.”

The famed labs, which do sensitive military work for the U.S. government, will likely be restructured as a separate, independent U.S. subsidiary managed by a board made up of of three U.S. citizens.

Lucent made numerous tactical errors on the road to its merger with Alcatel, whose shareholders will own some 60% of the combined entity. Lucent snapped up companies at premium prices at a furious pace, including 38 in its first five years of existence. It then sold many at a loss when the expected efficiencies or markets failed to materialize.

To help sell equipment, Lucent extended financing to small telecoms that popped up in the wake of deregulation, only to lose both the loans and the business when the companies folded.

Perhaps the biggest chink in Lucent’s armor was its inability to shake off Ma Bell-like habits that stressed precision over promptness and valued discussion over action. It was an approach that worked when AT&T was a government-sanctioned monopoly, but it could not keep up with the world that emerged from deregulation.

“Lucent clung to its past as the industry changed,” says Lisa Endlich, a former Goldman Sachs vice president who wrote a book titled “Optical Illusions: Lucent and the Crash of Telecom.” Lucent “didn’t move quickly enough to service companies moving into the Internet, which was an expanding market,” says Endlich. “Instead it stayed with telcos.”

Concurs Jay Pultz, an analyst with the consulting firm Gartner in Connecticut: “Other networking equipment companies, like Cisco, made the right bets and moved more aggressively into the Internet side of the business.”

Lucent’s leaders had spent most of their careers in a tightly regulated environment that offered few rewards for risk-taking or foresight. As recently as 2003, 10 of Lucent’s 11 top executives were former AT&T hands. Russo herself had been first an AT&T manager and then a Lucent executive before leaving to run Eastman Kodak and ultimately returning as Lucent CEO.

Ingrained AT&T stodginess may have doomed many of Lucent’s initiatives. In 2000 the company acquired Spring Tide Networks, a Massachusetts-based network-switching company for $1.3 billion in stock. The deal proved a failure and in 2001 Lucent had to write off $975 million of the value of the acqusition.

Meanwhile, Lucent paid $4.5 billion in stock for Chromatis, an Israeli company that specialized in optical networking systems. Lucent discontinued the product line within a year and essentially wrote off its entire investment.

Even as it paid too much for the wrong kinds of companies, Lucent was parting ways with businesses that could have helped it grow. “In retrospect, moves like the spinoff of Avaya [to shareholders in 2000] was a big mistake,” says Gartner analyst Pultz.

Avaya sells communications systems and software to businesses and government agencies. Stock of the Basking Ridge-based company traded around $11.50 a share last week, nearly four times Lucent’s price.

The alliance with Alcatel could help Lucent recover from its stumbles and become a larger force in Internet network equipment—a field in which Alcatel is powerful.

“I wasn’t surprised to hear that Lucent and Alcatel are merging,” says Endlich. “And I think the deal makes sense for both companies.” The stock of both edged up in the days following the merger announcement, suggesting that Wall Street likes the combination. At least for now.

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