Alcatel + Lucent = Bay Networks
The Alcatel and Lucent merger was announced while we were preparing this edition of the Lippis Report. It only makes sense that as the service provider market consolidates so too does the industry supply chain. The service providers have gone through bankruptcy and consolidation phases over the last five years. With service providers focusing around broadband, enterprise customers and mobility further consolidation is very likely. With a smaller number of more powerful buyers of telecommunications equipment it´s only natural that there will be a smaller number of equipment vendors. Which brings us to Alcatel and Lucent.
On April 2nd Alcatel and Lucent Technologies announced that they will merge and form the world´s leading communication solutions provider. Some highlights: the combined company will have a financial base and revenues of approximately USD $25 billion based on calendar 2005 results; the new Alcatel is larger than Cisco by some 20%, albeit Cisco´s main revenues come from the enterprise market; the new Alcatel will be a global convergence leader with one of the largest and most comprehensive wireless, wireline and services portfolio in the industry; they will also have one of the largest global communications R&D capabilities in the world. From a management point of view, Serge Tchuruk is to be non-executive chairman, while Lucent´s Patricia Russo will be the CEO, based in Paris. There will be equal board representation from both companies in this merger of equals.
My take: I´m skeptical that this will work
I have not seen a merger of equals work in our industry. Someone has to take charge, especially in a mixed cultural environment such as the new Alcatel. Also, I have no idea what a non-executive chairman is and what role Serge Tchuruk has? Also the fact that Patricia Russo will be the CEO in Paris while her office is in NJ does not bode well for stability and leadership for the new Alcatel. It´s not that I don´t have confidence in Ms. Russo, it´s just the distance and cultural divide between the concerns is too great. This will take a long time to sort out, if the merger is approved. It´s not clear if the new Alcatel will turn into a Bay Networks which was the merger of equals of Wellfleet Communications and SynOptics. Bay was never able to gain a footing to compete effectively with Cisco, the sole reason for merging. Their problem was a distance and cultural issue too, but their differences were between east and west coast in the same country. In the end Bay was acquired by Nortel.
True the new Alcatel will have its revenues nearly split between North America and Europe with each contributing approximately 35%, with the remaining 30% coming from Asia, the Caribbean & Latin America and the Middle East & Africa. This and the Bell Labs resource do differentiate the new Alcatel from Cisco, Nortel, Siemens, Ericsson, et al. But Lucent will now be part of the French Socialist state with larger pension and retirement plans than its American and European competitors. There will be a reduction by 10% in the combined force of 26,000 over the next 3 years and the new Alcatel does see about $1.7B worth of efficiencies too. Chances are that most of this reduction in force may come on the US side as it´s more difficult to fire French employees in France.
This may be Cisco´s golden opportunity to aggressively take share in the service provider market. It knows how to take advantage of a competitor when it´s in the fog of re-organization and re-structuring. The communications world continues to move toward a converged voice, video and data model on IP for which Cisco is so well positioned.
