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September 11, 2012

Alcatel-Lucent Restructures

By Peter Bernstein, Senior Editor

With the global recession continuing to cause havoc on the telecom equipment sector — particularly in key markets such as Europe and with China saying its economy is not expanding as well as hoped— Alcatel-Lucent (News - Alert) has revealed further steps it believes will help it weather the storm of market uncertainties. 

Following up on its July Performance Program announcement of various cost cutting measures — annual operating cost reductions of €750 million (US$958 million) by the end of 2013, in addition to the €500 million ($639 million) cost reduction program it already had in place, Alcatel-Lucent (ALU) CEO Ben Verwaayen (News - Alert) is putting in place a new business model that pending approval will become effective January 2013. The goal according to ALU is to:

  • Focus on profitable markets and customers around the world
  • Optimize tendering and sales in a single global sales organization
  • Accelerate the pace of transformation
  • Maintain a strong innovation engine with continued R&D investment
  • Manage their patent portfolio as a dedicated profit center
  • Concentrate on higher value-added contracts in Managed Services
  • Simplify management layers across the company

 The announcement was mostly in broad strokes. It contained details mostly about the executive realignment and the move to centralize operations. The core team running the company will go from 13 to seven with consolidated control over fewer moving parts in order to meet the objectives described above.   

The reconstituted leadership group

Below are the executives who will be running the company and their new responsibilities:

  • Ben Verwaayen — stays as CEO and head of the management committee.
  • Paul Tufano — remains as CFO and will also be chief operating officer (COO) with global responsibility for supply chain, "strategic industries" and submarine
  • Robert Vrij —elevated to president, global sales and marketing.
  • Stephen Carter — currently head of EMEA (Europe, Middle East and Africa) and corporate marketing and communications, becomes the president of managed services. He also is responsible for the execution of the corporate restructuring process and remains head of corporate marketing and communications
  • Philippe Keryer — currently head of networks, becomes president of networks and platforms, in charge of four global business units that have separate P&L (profit and loss) responsibility.
  • George Nazi — remains as president of the global customer delivery division.
  •  Jeong Kim (News - Alert) — remains head of Bell Labs and corporate strategy, and gets responsibility for ALU’s patent portfolio

Narrowing the product portfolio

Going back to when AT&T (News - Alert) and Alcatel were separate companies, and following the absorption of Lucent, the original companies and then the combined ALU felt that they were capable of serving any and all communications equipment markets. This was evidenced before the tech bubble burst by aggressive acquisitions to assure respectively they served every market nook and cranny everywhere in the world. Over the years, as dictated by economic and strategic concerns following the bubble popping assets were jettisoned. Lucent sold its consumer products market to Phillips and spun out Avaya. It merged with Alcatel and just recently ALU sold their contact center solutions entity Genesys. 

Given the new structure it remains to be seen what may go next given the new approach.    

That said, it should be noted that Keryer’s organization, along with the management of the patents, is key. He will be in charge of four separate business units:

  • Core Networks, the optical and IP portfolio
  • Fixed Networks (broadband access)
  • Wireless, with a focus on AlcaLu's existing customers in North America, EMEA and China
  • Platforms, or "unified software platforms for control, optimization and network analytics," according to the company's press release

In addition, the Alcatel-Lucent Shanghai Bell (ASB) joint venture will see Rajeev Singh-Molares, working with the chairman of ASB, take on a dedicated role focusing on the transformation and development of the Chinese operations.

Ben Verwaayen stated that, “The Performance Program announced on July 26 is the spearhead of these changes. We are putting in place a simple, robust delivery mechanism for the company to ensure that Alcatel-Lucent meets its target of a total cost saving of Euro 1.25 billion by the end of next year.”

How all of this will shake out is anyone’s guess. The company’s stock has been under significant pressure. Part of this has been the result of the general turmoil in the sector caused both by global macroeconomic forces.  Part has been the decision by service providers, particularly in Europe but to a lesser extent in other key markets, to pull back on all but essential CapEx. Part has been the result of labor challenges in France and other places. And, part is attributable to the intense competition in virtually every product and market the company serves.

As those who follow the sector know, ALU has been reorganizing itself to become profitable and get back in the good graces of investors for several years. What makes all of this extremely dramatic, aside from the obvious given the stock price, are a couple of things. First, there is the harping already from the financial community that this appears to be insufficient.   There remains another quarter to get through before the changes are supposed to become effective in January, and the markets are likely to be harsh taskmasters if the metrics they have established for progress are not met. Second, since there were few specifics, there certainly are open questions as to what products and even business units will stay and go. Without wishing to start a round of wild conjecture, I did find it interesting for example that there was no mention of ALU’s Enterprise operations which periodically have been a source of industry buzz.  

 I will admit I am not a financial analyst and do not even play one on the Internet or TV, however, when one looks at the assets that constitute ALU its valuation by the financial analysts is confounding to me. ALU has clear strength in the IP and optical parts of their business. They have a mix of products and services that go right to the sweet spot of the one place service providers are spending money, wireless. This goes across the board in regards to 4G LTE rollouts, but also speaks to their strong lightRadio product line for small cell deployments. In addition, they are positioned well in the critical Chinese market. 

However, most importantly, they are sitting on what is arguably the most impressive intellectual property treasure trove in the entire tech industry. Bell Labs remains an impressive engine of innovation for what they are doing right now and have in the works that can provide differentiated value once realized in products and services by ALU or through licensing.   Plus, given the valuations placed on things like the Nortel patents, to name just one example, and the values under contention in the multi-billion IP battles being fought in the mobility sector around the world, it is hard to imagine what core technologies Bell Labs holds the rights to that have yet to surface in either licenses or litigation. 

In theory, the value of the IP is factored into the company’s overall valuation, but one wonders if the financial guys have enough visibility into what’s in the vault. Obviously only time will tell regarding both the value of the IP, and the overall value of the company.  It is likely to be an interesting next few months on several fronts.


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Edited by Brooke Neuman
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