Alcatel-Lucent looks to restore lost momentum

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It could hardly have got off to a less auspicious start. Seven weeks after France’s Alcatel and Lucent of the US merged, the telecommunications equipment maker issued a profit warning.

But Patricia Russo, chief executive of Alcatel-Lucent, says she has had “absolutely not one nanosecond of doubt” about the mega-merger. “It is a compelling fit,” she says in an interview with the Financial Times.

The merger is a response to consolidation among the telecoms companies that supply voice and data services to consumers and businesses. Scale is the name of the game, given the ferocity of competition, and the Alcatel-Lucent merger has been followed by a joint venture between Finland’s Nokia and Germany’s Siemens.

The question is whether Alcatel-Lucent can restore momentum after its poor start, which partly stems from customers postponing orders in the run-up to the merger’s completion because the two companies could not give assurances about which products would continue.

The merger was unveiled in April and finalised on December 1, and Alcatel-Lucent’s pro forma 2006 results recorded falls in revenue and operating profit.

However, Alcatel-Lucent is predicting revenue growth in the “mid-single digits” during 2007.

Richard Windsor, analyst at Nomura, said Alcatel-Lucent will have to win market share in the second half of 2007, if it is to achieve 5 per cent growth, because the group said in January that revenue would decline year on year in the first quarter.

“The company will be very focused on cost-cutting in 2007, making market share gains unlikely,” he said in a research note that had a “hold” rating on Alcatel-Lucent’s shares.

His argument has been strengthened by how the plans to extract cost savings worth €1.7bn ($2.2bn) over three years have become a headline issue in the French presidential elections.

About 12,500 jobs are to go from Alcatel-Lucent’s 79,000 strong workforce, including almost 1,500 positions in France, where trade unions are organising strikes. Ségolène Royal, the Socialist candidate for president, described the redundancies as “unacceptable”, and Serge Tchuruk, Alcatel-Lucent’s non-executive chairman, was summoned to a meeting with Dominique de Villepin, France’s prime minister, last week.

Ms Russo says the group is seeking to remove uncertainty in the workforce, partly by explaining the precise numbers of lost jobs in individual countries as quickly as possible. She also stresses the group will abide by laws governing redundancies, including France.

The history of transatlantic mergers is “mixed at best”, according to Tim Boddy, analyst at Goldman Sachs, who cites examples such as Ahold-US Foodservice, Daimler-Chrysler and Vivendi-Universal.

The relationship between Ms Russo, Lucent’s former chief executive, and Mr Tchuruk, Alcatel’s former chief executive, is “another area of uncertainty”, said Mr Boddy in a research note.

Ms Russo says she and Mr Tchuruk have “a very good relationship and we are getting along very well”. She adds the idea of cultural differences between Alcatel and Lucent has been overblown.

Mr Boddy, while identifying risks to the merger’s success, has a “buy” rating on Alcatel-Lucent’s shares because he believes the combination leaves it stronger than its constituent parts.

Ms Russo denies Alcatel-Lucent could have done anything to avoid the uncertainty felt by customers that prompted them to delay orders.

But she gives a bullish outlook for the telecoms industry, and by extension Alcatel-Lucent, by predicting the number of people with internet access will increase from 2.5bn today to 5bn by 2015.

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