Failure to shake off Ma Bell-like habits put it on the road to merger with AlcatelMurray Hill
In unveiling plans to merge with FranceÂs 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 LucentÂs 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.
ÂThe 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,Â says Narain Gehani, chairman of the computer science department at NewarkÂs New Jersey Institute of Technology.
ÂBut that market grew smaller as telecom companies continued to merge, and equipment purchases kept shrinking,Â says Gehani, who worked at LucentÂs Bell Labs division for 13 years and wrote a book about it called ÂBell Labs: Life in the Crown Jewel.Â
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 LucentÂs 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.
ÂLucent clung to its past as the industry changed,Â says Lisa Endlich, a former Goldman Sachs vice president who wrote a book titled ÂOptical Illusions: Lucent and the Crash of Telecom.Â Lucent ÂdidnÂt move quickly enough to service companies moving into the Internet, which was an expanding market,Â says Endlich. ÂInstead it stayed with telcos.Â
Concurs Jay Pultz, an analyst with the consulting firm Gartner in Connecticut: ÂOther networking equipment companies, like Cisco, made the right bets and moved more aggressively into the Internet side of the business.Â
LucentÂs 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 LucentÂs 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 LucentÂs 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. ÂIn retrospect, moves like the spinoff of Avaya [to shareholders in 2000] was a big mistake,Â 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 LucentÂs price.
The alliance with Alcatel could help Lucent recover from its stumbles and become a larger force in Internet network equipmentÂa field in which Alcatel is powerful.
ÂI wasnÂt surprised to hear that Lucent and Alcatel are merging,Â says Endlich. ÂAnd I think the deal makes sense for both companies.Â 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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