Alcatel-Lucent CEO Michel Combes Hints at What Lies Ahead

By Peter Bernstein May 09, 2013

He has only been on the job several weeks, but new Alcatel-Lucent CEO Michel Combes got a baptism by fire as he addressed the company’s shareholders during its annual meeting in Paris.

To Combes’ credit, he was not shy about laying out what is on his mind in terms of his approach to the strategic review the company is currently undergoing. He also was on hand when a resolution to help the company increase its cash position via the sale of more stock had to be withdrawn because the required 25 percent quorum of shareholders for a vote were not on hand. All of this led to what has been widely reported as a rather raucous initiation for Combes. However, he seemed unfazed as might be predicted given his reputation as a cost-cutter when he was an executive at Vodafone and France Télécom.  

Following the Ericsson Example

Citing the successful turnaround of arch equipment rival Ericsson, Combes did not mince words, which made headlines around the world and the industry. He told the audience, "We must choose with precision the products in which we invest…Where we can't make a difference alone, we must exit without delay, or create partnerships that will allow us to reach critical mass." 

He was blunt is saying the days of Alcatel-Lucent being a “generalist”—because of all of the markets they participate in and shear breadth of their product lines in each sector they likely lead the industry in SKUs—the emphasis must shift to being a multispecialist. "The current situation is hardly sustainable in the long term," he noted.  

How all of this translates into actions remains to be seen, although Combes did state:

  • He will be offering specifics about the path forward in late June or early July
  • He is committed to implementing the cost-cutting put plan of previous CEO Ben Verwaayen, which promises to deliver €1.25 billion ($1.64 billion) in cuts by the end of 2013  

What remains problematic is how far and how fast he will be able to move. There are lot of interests to be satisfied, which is going to make this complicated to say the least given the preferences of various stakeholders which includes not just investors and creditors, but large enterprise customers, major service providers, unions, regulators, politicians and a raft of value-chain partners just to name a few.  In fact, while the Ericsson is example is similar, it can be argued that the French government and unions pose bigger hurdles than those encountered by the Swedish company.

Adding to all of the intrigue is just how far Combes might be willing, or have permission from his board, to go in possibly jettisoning certain lines of business. Yes the company has been hemorrhaging cash at a rate Combes noted is “unsustainable.” It needs to be addressed. 

To that point, how to handle the stock as currency for raising more cash is always dicey. Indeed, Alcatel-Lucent Chairman Philippe Camus said the resolution, which would lower the nominal value of the company’s shares from €2 ($2.63) to €0.05 ($0.06) didn't mean he and his colleagues on the board were planning an immediate rights issue. This would heavily dilute current shareholders. The anger it would stir, along with concerns about long-term viability is something that a restructuring company that has already put up as collateral key assets surely wants to avoid. It is why Camus stated, “There is no short-term plan…The idea is to have the flexibility necessary when the chance arises.” Whether this proves to calm investor fears remains to be seen.  

It must also be noted that Combes’ challenges are more than an exercise in raising money and dumping under-performing assets. Consideration obviously also has to be given to core competencies, brand reputation and the ability of management to turnaround assets which others in the industry have managed to profit from. In other words, this is not just about strategy, but execution. It is also why when Combes was named CEO, questions were raised why the board chose another executive with a service provider background to restructure a systems and professional services company, which puts added pressure on what he is going to unveil in a few weeks. 

Nothing in the strategic review process should be ruled out, but as with what happens when companies decide to downsize by offering attractive buyouts to employees to get them to retire early, there is a danger that you will lose what is most valuable, i.e., the knowledge base, talent and associated customer trust that propelled the company to dominance in the first place. In fact, the trust issue while difficult to quantify is a big one. The old saying that trust is hard to earn, easy to lose and almost impossible to regain will hopefully be a major part of the strategic review.

One of the reasons Combes is able to prepare his specifics in what is actually a relatively short period of time, is that such reviews have been undertaken several times in the past few years. The numbers are the numbers in terms of asset valuations and where people have views on where operational efficiencies and headcount reductions can in theory make a difference. 

That said, this is as much about art, as in the art of leadership, as it is about numbers. It is going to be interesting to see what the “multispecialist” company Combes envisions will consist of in a few weeks from now. There is a lot at stake along with a whole bunch of stakeholders who are itching to know the broad details and the fine print.

Edited by Rachel Ramsey
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