To The board of Alcatel – Time To Fire Russo and Sell Off Lucent

Implications: The issues are much bigger than just Russo trying to keep her job.   I am not one to say mergers don’t work.  However, I can say the merger between Alcatel and Lucent has always been viewed by many telecom industry professionals as a mistake. Bankers merged Alcatel and Lucent.  I have said this in past analyses:  The smarter merger would have been with Motorola and Nortel.

Analysis: I have been supportive of Russo from the beginning.  I have stated that she should be praised for the monumental job of restructuring Lucent.  However, I have also stated in past analyses that she should step down.  My call for her to step down has not been based on her abilities but simply based on my experience in dealing with post restructuring CEOs.  After a CEO has restructured a company the size of Lucent the CEO typically leaves.

The departure of a CEO that has guided a company through a restructuring has nothing to do with ability; it has everything to do with exhaustion and burn out.  A CEO in Russo’s position will often get so attached to the company that they cannot see the forest through the trees.  I am not singling out Russo, it is what it is for all CEOs.

I have called for Russo to leave as far back as early 2007.  I have not criticized her ability.  Frankly, the board of Alcatel-Lucent should have replaced Russo within 6 months to a year after the merger agreement was signed.  The year delay would have allowed for a transition phase.

Public comments by the press about Russo not speaking French are valid.  Unfortunately the relationship between French and American telecom engineers has never been good.  Bankers ignored the advice of industry professionals about merging the companies.  Bankers wanted to close a deal which most telecom industry professionals knew would not work.  Culturally the two camps have never played well.  Just look at the standards community.  For those investors who see the development of technical standards in a public forum as just a group of engineers sitting around doing their thing, you are so WRONG.  Technical standards are all about business; jockeying for you company’s position in the global telecom community.  The French and Americans telecom engineers have never played well.  I will go further and say: They cannot stand each other.  The telecom business is very much a technology driven industry.  If the engineers cannot get along the companies will never get along.

The rumors and stories that have been coming out of New Jersey and Illinois (the homes of Lucent) have made most American telecom professionals wondering what the business community was thinking about when the companies merged.  It made a lot of telecom professionals realize the investment bankers know very little about the nuances of the business.

As someone who tries to find a silver lining in even the most dire business situation, I believe Alcatel Lucent’s biggest mistake was leaving Russo in place.  The animosity between Lucent and Alcatel employees would not have gone away.  However, the company would have been run like a French company.  Don’t let anyone tell you that this was a merger between equals because it was not.  Alcatel acquired Lucent.  Alcatel’s board tried to calm U.S. fears that the French were taking over America’s most important telecom think tank.  Alcatel’s board even went so far as to appoint Russo as its CEO.  I give the French a lot of credit for taking the steps necessary to close the deal.

When you look at the merger you may want to ask why would two companies like this merge?  During the 1990s, engineers of Alcatel hardly ever participated in the standards bodies of North America.  When Alcatel engineers postured they did so in their backyard; France.  When Alcatel was doing business in the U.S.A., it hired locals (meaning Americans) to run the U.S. operations.  Further, Alcatel itself played fairly nice on American soil.  I personally found all of the American Alcatel employees very pleasant to do business with and even very creative.  However, Alcatel as a corporation was never ever close to being the Number One or even the Number Two telecom vendor in North or South America.  The company never posed a threat.  However, the Paris based company was big outside of the Americas and had tons of cash and ambition.  Hence, you now have a situation in which a merger was likely.

Imagine it is 2002 and imagine yourself being Lucent.  You are strapped for cash you have downsized and restructured all you can to stabilize the company for either growth or a sale.  Alcatel is one of the few telecom companies in the world that is not in deep financial trouble, has cash, and has ambition.  Thanks to the 2001-2004 recession Alcatel now has opportunity.

The merger made sense at only one level – financial.  The trouble with most mergers is that the bankers tend to believe issues like corporate culture will not get in the way of a successful merger.

Investment bankers usually get paid per transaction.  Once the transaction is done the bankers are gone.  What shareholders are stuck with is a company that needs lots of merger-integration work.

Here is what should have happened after the merger agreement was signed.
-    Pat Russo would stay on for no more than one year.  A new CEO would have taken over after the first year.  This would have allowed for a smooth transition fro Lucent.
-    Alcatel personnel should have been assigned to lead key business and technology areas of Lucent, within the first year.
-    Parisian based employees and U.S. based employees should have been swapped on a temporary basis to merge and yes even to force the Alcatel culture onto the Lucent employee base.  One company has to lead and it was not lost on any Lucent employee that they had been acquired by Alcatel.  We are talking employee exchange programs.
-    These programs enable the employee population to build friendly relationships.
-    Product lines of Alcatel and Lucent needed to be merged within the first 20 months.
-    Standards positions needed to be consolidated within the first month
-    Standards leadership globally needed to integrate policy positions with the first month.
-    A technology plan, other than we are going to do it better, needed to be articulated clearly to the carrier community.  If your customers think you are struggling to figure what you sell they will not buy.
-    The merger needed to be hyped at every industry venue in the first month.

You would have assumed that after the CFO was forced to leave, something positive would have come out of the change.  The board of Alcatel needs to get a new CEO and then sell of Lucent.  The board needs to get Russo out of the way now to make any positive movement.

My suggestion to Alcatel is to sell Lucent in two chunks.  For decades Motorola and Lucent have shared a common heritage.  Motorola and Lucent employees get along.  Motorola and Lucent executives have always gotten along.  Even during the worse of the competitive battles the two companies in the wireless arena were still respectful.  As for the wireline part of the business, sell that to Nortel.  Nortel and Lucent teams have also gotten along for years.  Do not forget that Nortel and Lucent were both part of the original Bell System.

Both Motorola and Nortel are in deep financial trouble.  But both companies have motivated shareholders and bankers that need to think about how to salvage their companies.  Both companies likely share a set of common bankers and hence multiple mergers may be possible.  Yes, financials aside.

Both companies have shareholders that have the ability to close a deal and make it happen.  Lucent still has intellectual property and talent that can be integrated into Motorola and Nortel.

This is not going to be easy but if shareholders of Alcatel want to maximize the value of their shares a sale is necessary.  As complex a merger I am talking about this is the only way I can see for everyone to win.  The corporate cultures of Motorola and Nortel are different than the corporate culture of Lucent.  However, there is respect between the employee bases at all levels.

This respect is what will enable Alcatel, Motorola, and Nortel to emerge with a win.