Chairman Tchuruk, CEO Russo To Step Down From Alcatel-Lucent
By Leila Abboud and Jethro Mullen
The Wall Street Journal
Tuesday, July 29, 2008

PARIS -- The architects of the trans-Atlantic merger that created Alcatel-Lucent two years ago are stepping aside, leaving a telecommunications-equipment firm still struggling to figure out how to survive in an industry plagued by increasingly brutal competition and eroding profits.

Chief Executive Patricia Russo will leave the company by year-end as she helps look for a successor, Alcatel-Lucent said in a statement Tuesday after reporting a net loss for the quarter ended June 30 of €1.1 billion ($1.73 billion) compared to a net loss of €586 million a year earlier. Chairman Serge Tchuruk will step down on Oct.1.


Associated Press
Alcatel-Lucent CEO Patricia Russo, right, and Chairman Serge Tchuruk talk during a shareholder meeting. In May, shareholders approved a resolution that made it easier to remove the merger leaders.

"Our strategy is taking hold, and our results are demonstrating good operational progress.  That said, I believe it is the right time for me to step down," Ms. Russo said in the statement.

The exits of Ms. Russo and Mr. Tchuruk will bring to a close a painful first act for the telecom-equipment giant, which was created in 2006 by merging the Paris-based Alcatel SA and the Murray Hill, N.J.-based Lucent Technologies.

Since the merger, Alcatel-Lucent has reported six consecutive quarters of losses, and its market capitalization has been cut in half.

Investors and analysts have been urging the company to remove Ms. Russo for more than a year, and news of her and Mr. Tchuruk's departure buoyed the company's stock, which is traded on the Paris exchange.  Alcatel-Lucent shares rose 2.4% to €3.92 in midday trading.

Yet some expressed concern that no successor had yet been found, and doubted whether the change in leadership meant that Alcatel-Lucent's fortunes would improve.

"I don't think it should be seen as good news," said WestLB analyst Thomas Langer. "What you need in such difficult times is true leadership." Mr. Langer, who has a "sell" rating on Alcatel-Lucent stock, said no potential replacements spring immediately to mind.

When the merger was announced two years ago, Ms. Russo and Mr. Tchuruk had touted the link-up as a way to gain scale and cut costs in order to better compete with new low-cost manufacturers emerging especially from Asia.

Another factor that had pushed the two companies to merge:  telecom operators such as Verizon Communications Inc. and Spain's Telefonica SA were also consolidating, so gear makers had to follow suit to try to maintain negotiating power with their customers.

But right away, Ms. Russo found herself struggling to integrate the two firms.  The expected cost cuts, especially in research and development, were much more difficult to wring out than expected.

To make matters worse, Alcatel-Lucent competitors such as Telefon AB L.M. Ericsson went on the attack, trying to steal customers while the Franco-American firm was distracted.

Alcatel-Lucent was forced to cut prices and even take some losing contracts last year to keep a foothold in important emerging markets like China and India.  The company issued repeated revenue and profit warnings, losing the confidence of some analysts and shareholders.

Pressure on Ms. Russo increased last fall, when the French press was awash with reports that the board was growing concerned about the firm's woes.  Ms. Russo weathered the storm, getting the board to approve a new turnaround plan that included a new streamlined management team.

Since then, however, the company's performance has continued to founder.  Alcatel-Lucent's €1.1 billion quarterly loss announced on Tuesday was partly the result of a €810 million goodwill write-down related to one of the company's wireless divisions.  Revenue declined 5.2% to €4.1 billion, hurt by the dollar's weakness in relation to the euro.

The picture doesn't look much brighter for the rest of the year, as economic woes make telecom operators reluctant to spend to upgrade their networks.

The company maintained its 2008 outlook of a 2% to 5% decline in revenue, an adjusted operating margin in the mid single-digit range and an adjusted gross operating margin "in the mid-thirties."  Alcatel-Lucent still expects the overall telecom equipment and services market to remain flat in 2008.

In its statement, the company also said it would overhaul its board to bring in fresh blood and reduce its size.  One director, Henry Schacht, who preceded Ms. Russo as CEO at the former Lucent, will resign from the board immediately, the company said.

Write to Leila Abboud at leila.abboud@wsj.com and Jethro Mullen at jethro.mullen@dowjones.com

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