February 07, 2013

Alcatel-Lucent Confirms CEO Verwaayen to Step Down


Along with announcing a lackluster quarter, Alcatel-Lucent (ALU) confirmed the rumors that CEO Ben Verwaayen had his offer to not stand for reelection to the company’s Board of Directors in May and resign from his position as CEO pending the Board finding a replacement.     

First, on the financial front, ALU reported a net loss of $1.85 billion for 2012. The explanation was that it has been suffering from lower than expected sales in Europe and China and it took a write-down in its wireless and optics businesses.

Highlights from the earnings release:

  • Sales fell 5.7 percent to $19.3 billion in 2012.
  • Adjusted operating profit was $156.6 million.
  • Margin of 2.9 percent was below the 5-9 percent Verwaayen had promised.
  • Cash was depleted $908.6 million in 2012.
  • Fourth quarter sales fell 1.3 percent from a year earlier as only the U.S. market was strong
  • The net loss stemmed largely from a write-down of $1.9 billion, which the company said was "related to the depreciation of goodwill and fixed assets, and the corresponding impact on deferred tax," which CFO Paul Tufano said was linked (as noted above) to the lower value of ALU's wireless and optical assets.

Verwaayen’s problem was that despite what seemed like aggressive efforts over the years to right-size the company and return it to consistent cash flow and profitability, reality is that during his tenure the company’s stock has lost 70 percent of its value (wiping out roughly $9.36 billion in market cap) which led to its being taken off the French blue-chip index, and has raised the possibility of de-listing on major exchanges.  

The merger of Alcatel and Lucent Technologies occurred in 2006, of which Verwaayen took the helm in 2008. To say the least he has had his hands full. 

The short list includes: a continuation of post-merger issues; increased competition from Ericsson, Huawei a rebalanced Nokia-Siemens Networks; intense competition from a host of point solutions companies; competition from the likes of Cisco, Juniper and a variety of others as the infrastructure world goes more wireless and data center centric; the global recession and European sovereign debt crises; and labor union issues, which have made getting costs under control problematic.  

Verwaayen trimmed the headcount, sold off the Genesys contact center solutions business, implemented a much more aggressive approach to monetization of the vast trove of intellectual property (IP) Bell Labs and Alcatel’s Labs have created over the years – but have either not been adroit product realization or have not gone after those who have infringed on the IP – and recently helped secure commitments with Credit Suisse AG and Goldman Sachs Bank USA for 1.615 billion Euros ($2.12 billion) in senior secured credit facilities. 

While the latter has given the company some breathing room to meet its financial obligations, and in theory rebound as a result of what industry analysts are saying it a likely rebound in service provider spending necessitated by the “data storm” and the need to deploy 4G LTE, there has been more than a bit of skepticism as to whether ALU can compete on price given the pace at which it has been able to cut costs, and what the proper product and services balance might be that assures a return to profitability and engenders confidence in future growth.

Indeed as a result, more asset sales are likely, including the sale of the company’s submarine and enterprise equipment businesses. Valuations of these assets are ongoing, and where they stop and who the new owners are likely to be is anyone’s guess. This is particularly difficult based on how to value customer retention rates in the hotly competitive enterprise equipment market.

It should be noted that while the creditors express their confidence with cash, they were also careful to manage their own risks by asking that the 29,000 patents held by the company and its U.S. subsidiary be used as collateral. 

Verwaayen looks back

CEO Ben Verwaayen was reflective in his remarks about his impending departure. “If you look at the task at hand, it is focused on execution,” he said. “Looking in the mirror, I felt maybe that's not my natural strength, and maybe it will be good for the company to get fresh perspective.”

He also noted that, “Alcatel-Lucent has been an enormous part of my life. It was therefore a difficult decision to not seek a further term, but it was clear to me that now is an appropriate moment for the Board to seek fresh leadership to take the company forward…The combination of our recent refinancing and the implementation of our restructuring plan will put the company on a secure footing for the successor the Board will seek to appoint.”

Philippe Camus, Chairman of the Alcatel-Lucent Board, said, “Over the last few years, Ben has set a new direction, created one company out of two, and has recently seen through the completion of the stabilisation of the company’s balance sheet, enabling us to move forward with confidence.”

He added his thanks for Verwaayen’s service and it has been announced that a search committee to find a new CEO will be chaired by Daniel Bernard and included Philippe Camus, Louis R. Hughes, Jean C. Monty and Jean-Cyril Spinetta, will monitor the process.

Hang on to your hats

I’m on record as saying that the next 12-18 months will be a tipping point in the ICT industries, and what happens in this time period will dictate industry structure for years to come. This includes the telecom equipment sector, service provider as well as enterprise, where the accommodation of change and moving quickly are not historic attributes. In that respect, Verwaayen may turn out to be prescient about his successor needing to be focused like a laser on execution. 

Who Alcatel-Lucent selects as its next CEO, and what skills the Board decides are paramount for next Alcatel-Lucent are going to say a lot. 

Financial analysts are already out with their “I told you so” analysis and recommendations for deeper cost cuts and asset sales, and investors thus far have rewarded the stock with a bump. All of this is nice. It also is very short-term. The truth is this is also about cultural change and getting the strategy right, and that’s why leadership is important as the recent changes at Yahoo illustrate.

Time actually is of the essence for the ALU Board. They need to be thorough to assure they get the right person to lead the company, but given what is going on in the industry they had best be fast along with being right. The whole telecom world is watching. This is a Board that historically has not been a favorite of the financial community. IT has the opportunity to demonstrate that it is up to the task at hand.

It is going to be an interesting couple of months.




Edited by Braden Becker



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