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Alcatel-Lucent Hits the Ground, Prepares to Cut Products and Jobs
By Leila Abboud in Paris and Sara Silver in New York
The Wall Street Journal
Tuesday, December 5, 2006


Telecommunications-equipment maker Alcatel SA of Paris has put the finishing touches on its $11.6 billion acquisition of Lucent Technologies Inc.  Now the new Alcatel-Lucent will have to break the news to customers about which products it will continue to carry and tell the staff which 9,000 employees will lose their jobs.

How quickly and effectively the company can resolve those two issues will go a long way toward determining if it can deliver its promised target of 1.4 billion ($1.87 billion) in annual cost savings by 2009, a factor in making the merger a success.

Streamlining the technology portfolio without losing customers is one of the trickiest tasks the Paris company faces.  The new chief executive of Alcatel-Lucent, Patricia Russo, acknowledged the difficulty in an interview Friday, the day after the merger was finalized.  She said about 4,000 salespeople had been trained in recent days, and on Friday they were already fanning out to talk to customers throughout the world about the new product portfolio.

"There is no question that when you go through a merger your competitors see an opportunity to create uncertainty and doubt with customers," said Ms. Russo.  "But today we can start talking to customers about our plans to make them feel more comfortable."  She added:  "We want to do this in a way that is very considerate of customers' interests and takes into account what technologies they already have in place."

Telecommunications operators such as Verizon Communications Inc. and AT&T Inc. buy the infrastructure for their wireless and fixed-line telephone networks from equipment companies including Alcatel-Lucent, often committing to spend hundreds of millions of dollars during a decade or more.  Switching technologies is costly and inconvenient, so operators are reluctant to do so.  With the merger, these delicate client relationships will be tested as Alcatel-Lucent tries to get its customers to switch to the products that it wants to keep, while supporting the old products long enough to keep customers happy.

Alcatel-Lucent has estimated that about 400 million of the cost savings from the deal should come from rationalizing of the product lines.  For example, Alcatel is the market leader in equipment that lets carriers deliver high-speed Internet via telephone lines.  Lucent's wireless products for North America are much stronger.  Over time, the new company will want to move toward selling only the stronger products.  For telecommunications carriers that are running the older equipment, the change could be tricky and costly.

Where the technology is more evenly matched, Alcatel-Lucent will likely have to develop a single, updated version for all customers, said Niel Ransom, who until last year was Alcatel's chief technology officer.  This means it will be difficult for Alcatel-Lucent to cut these research-and-development costs quickly.

Paul Lacouture, executive vice president of engineering and technology for Verizon Telecom Group, said he was eager to hear Alcatel-Lucent's strategy for ensuring a "graceful transition" for the equipment that will be phased out, "but that is something we face all the time, merger or not, as each supplier brings out new generations of products."  Verizon Communications, together with Verizon Wireless, which is 45%-owned by Vodafone Group PLC, accounted for 28% of the $9 billion in revenue Lucent, of Murray Hill, N.J., posted for fiscal 2005. Verizon Communications also is a major Alcatel customer.

Another challenge of integrating Alcatel and Lucent is carrying out the planned job cuts without disruption or major protests from French labor unions.  The company has said that it is targeting duplicate back-office and administrative jobs, as well as research-and-development jobs for discontinued product lines.  More than half of the planned savings from the merger will come from cutting 10% of its global work force.

In France, strong labor laws protect workers from layoffs, so the process of firing people is slower than in the U.S.  Nevertheless, former Alcatel chief executive and chairman of the new company, Serge Tchuruk, said:  "There will be job cuts in France like everywhere else."

One union in the French city of Nantes put up posters with the slogan "1 wedding, 9,000 funerals."  Jean-Baptiste Triquet, a union representative at Alcatel, said that beyond the immediate layoffs, workers worried that "the new company does not see its future in Europe.  They aren't hiring in France, and once the layoffs are over there might very well be more R&D staff in China than here."

Analysts worry about the fallout from staffing cuts.  "The risk here is that the sales force gets distracted from taking care of customers while the integration is going on," said Jeffrey Schlesinger, an analyst for UBS AG.  In a competitive telecommunications-equipment market, "there are a lot of vultures circling, waiting to capitalize on any slip-ups," he said.

Write to Leila Abboud at leila.abboud@wsj.com and Sara Silver at sara.silver@wsj.com

http://online.wsj.com/article/SB116519588585939613.html?mod=telecommunications_primary_hs