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New Bosses, Same Big Problems

Posted: Sep 04, 2008 15:13 PM by Ben McClure

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Tickers in this Article: BT, MOT, NOK, S, T, ERIC, NT, ALU

If you think Alcatel-Lucent's (NYSE:ALU) new top brass will turn things around anytime soon, think again.

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Former BT (NYSE:BT) chief Ben Verwaayen will be the French-American telecom equipment maker's chief executive. Philippe Camus, a former EA co-CEO, will be non-executive chairman. The pair replace outgoing CEO Patricia Russo and chairman Serge Tchuruk who left in July after a string of dismal quarters.

Verwaayen and Camus do bring blue chip resumes to the Paris-based company. Eventually they may be able to turn things around.. But for the time being, investors should pass on stock. The company's problems won't be fixed overnight - regardless of who's in charge.

Brutal Business
For starters, the telephone-equipment business is lousy. Even after consolidation activity in the industry, including the merger of Alcatel and Lucent and the Nokia (NYSE:NOK) and Siemens joint venture, there are way too many equipment-makers chasing too few customers. Alcatel-Lucent must contend with Ericsson (Nasdaq:ERIC), Motorola (NYSE:MOT), Nortel Networks (Nasdaq:NT) as well as China's Huawei Technologies. Meanwhile, telecom carrier mergers, including Sprint's (NYSE:S) buyout of Nextel and SBC Communications' purchase of AT&T (NYSE:T), have left only a handful of equipment buyers.

Consider how Ericsson, probably the best of the bunch in the telephone equipment space, has fared. Forced to slash prices to fend off the competition, Ericsson has seen gross margins fall from 46% to 39% over the past three years. Little suggests the trend will find a bottom anytime soon. (To take a deeper look at a company's profitability with the help of profit-margin ratios, read The Bottom Line On Margins.)

Even so, Ericsson's numbers are stellar compared to Alcatel-Lucent's. On July 29, Alcatel-Lucent posted a $1.7 billion quarterly loss, including a $1.3 billion write-down on its North American wireless business. Quarterly revenues were down 5.2% year-on-year, to $6.5 billion.

Alcatel-Lucent's outlook doesn't help matters. Its CDMA (Code Division Multiple Access) network business, which makes up the bulk of the its revenue and represents its most profitable activity, is declining rapidly. Networks based on CDMA are losing ground globally to GSM (Global System for Mobile Communications). The company stated that the deepening economic slump in Europe could further weigh down its sales. Ouch.

Internal Strife
The organizational challenges are immense. Two years after the official close of the merger, integration is still a along way off. Remember, this is a company that pushed together two very different corporate cultures, with many people heading for the exits. The new CEO may have trouble motivating those employees who stuck around, especially once further restructuring plans show up on the agenda.

What's more, there could be disruption in the management ranks as Verwaayen hires his own people to surround him. (To learn more, read Is Your CEO Street Savvy? and Governance Pays.)

Bottom Line
All told, it's hard to fathom that anyone will be able to quickly reverse the course of a struggling business in a struggling industry. You should never say never; nothing is impossible, right? Investors shouldn't hold their breathe.

By Ben McClure

Ben McClure is director of McClure & Co., an independent research consultancy. Before founding McClure & Co., Ben was a highly-rated European equities analyst at London-based Old Mutual Securities. He also spent several years as a business/technology journalist at the Economist Group. McClure graduated from the University of Alberta School of Business with an MBA.

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