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The New Plan: Back to the Future for Alcatel-Lucent

Very recently, Michel Combes took over from Ben Verwaayen as chief executive of Alcatel-Lucent. Last week he endured a baptism of fire when he attended the company's AGM in Paris and appeared before a frequently angry and noisy audience of disgruntled shareholders.

He talked the talk and made all the right noises but, basically, the new bandleader was playing the same old tune. All together now.... the "new" Alcatel-Lucent strategy is to look after the money (it has burned through half a billion Euros in free cash in the first quarter of 2013), spend less and do more with dwindling resources.

In those respects the new CEO's address could have been lifted, lock, stock and barrel, from many of the "me too" speeches now being trotted out by various Eurozone politicians as they seek to rationalise and justify the ongoing period of austerity that is causing such despair in countries such as Greece, Spain and Portugal.

M. Combes also wants Alcatel-Lucent to transmogrify from being a "generalist" company into a "multi-specialist" one. The substance behind this gnomic utterance seems to be that AlcaLu will either partner with other companies in the sectors where it is finding it heavy-going and, failing that, will exit them altogether. Again, we have been round this particular loop before.

As an exemplar of what can be done, M. Combes drew his audience's attention to the changes wrought at Ericsson of Sweden in the past decade over which period the company successfully re-invented itself as the world's biggest vendor of wireless networking equipment.

It has indeed been a remarkable turn-around but also very costly. Between 2000 and 2004, Ericsson took the axe to more than 50,000 jobs and got rid of more than half its workforce. The strategy worked though and the company has now been in profit for nine years in succession and the share price is five times higher than it was when the company was on its knees back in 2002.

Alcatel has also had its difficulties. The 2006 merger, the so-called "marriage of equals" between Alcatel of France and Lucent of the US, was any thing but and proved to be a fractious union that was difficult to consummate. As a result the partnership took a long, long time to settle into something that really worked properly.

Speaking to shareholders at the Annual General Meeting Michel Combes said, “Ericsson was out of breath 10 years ago and they did it. We could follow a similar trajectory. It is possible to turn Alcatel around." He added, “Alcatel-Lucent’s situation today is hardly sustainable in the long run." And probably not in the medium run either unless action is taken now.

The new man needs to stamp his authority on the company and act quickly if he is to save the day. Alcatel-Lucent has posted four straight quarterly losses and the big, fat cushion of cash it used to sit on is looking thinner and more threadbare with every passing day. And now, to add insult to injury, Moody’s is threatening to slash Alcatel-Lucent's debt rating to junk status unless the company reins in out-of-control spending and gets itself back into profit within the next six months.

So now investors and Alcatel-Lucent employees and partners are waiting for July and the revelation of yet another "re-organisation plan". The company still has 72,000 staff, of whom 9,500 are in France. So one thing is for sure - more job losses.

"We must choose with precision the products in which we invest," says the new chief executive "Where we can't make a difference alone, we must exit without delay, or create partnerships that will allow us to reach critical mass."

Michel Combes also pledged to continue with his predecessor's plan to deliver €1.25 billion of cost cuts by the end of the year. He has six and a half months to make good on his promise - and the task has been made all the harder because, at the AGM, the company had to withdraw an "extraordinary" agenda resolution that would have brought in extra cash (via the mechanism of selling extra shares through a rights issue) because the necessary quorum of shareholders was not present at the meeting.

In fact, that corporate governance nicety has probably saved Alcatel-Lucent's top management from ever more shareholder opprobrium as the likely outcome would have been a further fall in the value of the shares held by existing stockholders. According to the company's chairman, Phillipe Camus, the rights mechanism would have seen the "nominal value" of Alcatel-Lucent shares sit within a range of €2 to €0.05. Given that the company's stock is hovering about the €1 mark, it's pretty fair bet that the share value would fall further rather than rise.

M. Camus extricated himself from a potentially extremely sticky situation by first mentioning the possibility of raising more cash by issuing more shares but then saying the company has no intention of making a rights issue "at the moment".

But that may be doing no more than postponing the inevitable. Unless Michel Combes can turn the company around in the alloted six and a half months it is probable that Alcatel Lucent will have to make a call for more cash and that would fan the banked fires of simmering shareholder anger into incandescent rage. - with who knows what results?

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