Since the proclaimed “merger of equals,” which actually was an Alcatel acquisition of Lucent Technologies, barely perceptible murmurs have built into anxious rumors suggesting that Alctatel’s purchase of the former American telecommunications-equipment powerhouse will go down as one of the worst acquisitions Alcatel has ever made. That’s really saying something, if you look back at Alcatel’s checkered history of mergers and acquisitions, but it’s increasingly likely that Alcatel will rue the day it determined that buying Lucent was a better course to follow than allowing it to fall into the hands of one of its competitors in a relentlessly consolidating telecommunications ecosystem.
Yes, there will be some operational efficiencies that result from the merger. The accountants and technocrats will cut the fat — as well as countless pounds of human flesh. Still, at the end of the day, does Lucent make Alcatel more competitive, given that the former has hemorrhaged its best talent during years of existential uncertainty, executed poorly in the field, and lost its strategic compass? The answer should be obvious, and of great concern to Alcatel’s many stakeholders.
The acquisition price tag was high enough, but that’s not where Alcatel stops paying for Lucent. Closing offices and slashing payroll will entail immediate hits on the books, even though long-term savings might follow. Meanwhile, it’s not clear whether Alcatel can sort out which R&D projects at Lucent are worth pursuing and which should be curtailed or scrapped. Many of Lucent’s products, including its formerly sterling portfolio of gear and other infrastructure for wireless operators, will need to be significantly overhauled. As mentioned earlier, excellent talent has left Lucent and gone elsewhere as the company staggered from quartered to quarter in recent years. The remaining troops at Lucent know they’ll bear the brunt of “cost savings” to be pursued by the merged company in 2007, and they also have suspicions that their salaries and pensions will be reduced in 2008.
The general rule of thumb with large acquisitions is that the bigger they are, the more likely they are to fail. The odds of failure increase if the companies involved are of similarly large dimensions, because the buyer’s ultimate control and its imposition of a coherent overall strategy are harder to achieve over the dissident din of recalcitrant (but influential) voices in the acquired firm. A further, related complication is cultural conflict, something that is certain to be acute in the case of Lucent, an American telecommunications vendor with regal AT&T Bell Labs lineage, and Alcatel, a French telecommunications concern with a substantial ownership stake held by the French government. Another strike against this deal, right from its inception, was the geographic distance that separates the executive teams of these two companies. As anybody in business can tell you, distance breeds distrust and suspicion. Paranoia is likely to be rife among executives on both sides of the Atlantic Ocean.
Today, as if on cue, Lucent announced its third-quarter earnings and revenue will fall, primarily because of slower sales of wireless network equipment in North America. Revenue is down, not only sequentially, but down sharply compared to revenue in the same quarter a year ago. Sales in China dropped off, though not as significantly as those in North America. Lucent isn’t trying to spin the story all that strenuously, and that’s probably wise. More of these announcements probably are on the horizon. Alcatel, which still plans to close the acquisition toward the end of this year, ought to resign itself to a steady diet of declining expectations.