Alcatel-Lucent’s new boss promises his rescue plan will be the last
MICHEL COMBES was frank. “Alcatel-Lucent has been almost permanently in restructuring,” he said. There have been “so many plans, so many presentations.” This time, promised Mr Combes on June 19th, would be different.
It had better be. Since France’s Alcatel and America’s Lucent merged in 2006, the combined entity’s share price has fallen by 86%. Only in one year, 2011, has the telecoms-equipment maker made a profit (see chart). It has not suffered alone. In 2011 Nokia Siemens Networks (NSN), begotten of another marriage of strugglers, said it would cut 17,000 jobs. Nortel Networks, once a Canadian champion, went bust in 2009. But this is scant consolation.
Mr Combes, who became chief executive only in April, believes that Alcatel-Lucent should stop being a “generalist” and concentrate instead on state-of-the-art broadband networks that transport data at ultra-high speeds. He also intends to cut costs and rejig the balance-sheet.
The new core business will, said Mr Combes, be “managed for growth”. American and Asian telecoms operators are eagerly installing whizzy new networks. He says cable companies everywhere will want them too—as will European telecoms operators, even if they are short of money for now. He predicts that the core’s revenue will rise from €6.1 billion ($8.2 billion) last year, out of €14.4 billion in all, to more than €7 billion by 2015, and expects its operating margins to rise from 2.4% to more than 12.5%. It will also get 85% of the firm’s research-and-development budget.
The non-core businesses—such as wireless, where Alcatel-Lucent has lacked scale—will be “managed for cash”. (Some of these, and even some core businesses, may be sold.) Mr Combes expects them to switch from being a cash drain of €115m in 2012 to become a fount of over €250m in two years’ time. Spending on R&D in older technologies will be cropped hard, from 35% of the total to 15%.
Mr Combes also promised to cut Alcatel-Lucent’s fixed costs by €1 billion, or about one-sixth, in the next two years. (This adds about €750m to cuts already due.) Around €300m will come from having sales forces in fewer countries. Another €100m is expected to be saved by outsourcing manufacturing. Besides being redirected towards hotter prospects, R&D spending will be cut by €200m overall. The new boss said he would raise €1 billion by selling assets, although he did not say which. Nor would he estimate publicly how many of Alcatel-Lucent’s 72,000 employees would lose their jobs, saying he ought to talk to the unions first.
Alcatel-Lucent has a little time to sort out its finances, thanks in part to a secured loan of €2 billion raised by Mr Combes’s predecessor, Ben Verwaayen, shortly before his departure. The sharper focus, cost cuts and disposals should mean that the new plan pays for itself over the next couple of years, even though €830m will have to be shelled out on redundancies, pensions and so forth. The company also plans to lengthen the maturity of its debt. Later, Mr Combes intends to reduce the €5.6 billion burden of gross debt by selling either more assets or new shares. Not surprisingly, he does not envisage a trip to the equity market “in the short term”.
In trying to do a few things well rather than lots of things badly, Alcatel-Lucent is joining a trend. It has “stopped being in denial for the first time since the merger,” says Pierre Ferragu of Sanford C. Bernstein, a research firm. “End-to-end has been a complete failure.” Ericsson of Sweden, the market leader, decided to concentrate on wireless networks. NSN chose to focus on mobile broadband, especially “long-term evolution” (or 4G) networks, and some services. It may be turning the corner. Costs have been cut, though revenues were flat in the year to the first quarter. Even so, Siemens is said to be seeking a private-equity buyer for its stake in NSN.
Of the leading equipment-makers only China’s Huawei and its smaller compatriot, ZTE, still want to do the lot, from handsets to routers. Indeed, a Huawei executive reportedly said this week that his firm might consider buying Nokia. The Chinese company later denied having any interest.
Specialisation is a wise step for Alcatel-Lucent, but difficulties still lie ahead. Mr Ferragu thinks Mr Combes’s plan “doesn’t look aggressive enough”. He estimates that Alcatel-Lucent needs to lay off 11,000 staff and shed another 4,000 by selling businesses. The pain is far from over.
Telecoms-equipment makers / The Economist
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