Alcatel's transformation
Ottawa Citizen
ottawacitizen.com
Newbridge shareholders voted to join what was only recently a lumbering conglomerate with a heavy French complexion. No longer. Alcatel will soon become a pure play in telecommunications, it's growing faster than the industry, and English is its official language of business.Jim Bagnall The Ottawa Citizen
Serge Tchuruk is masterminding the expansion of Alcatel's empire with acquisitions in North America.
Almost from the instant that Serge Tchuruk took over the helm of Paris-based Alcatel S.A. five years ago, he has been fighting two powerfully entrenched perceptions.The first is that this sprawling telecommunications equipment maker belongs to an earlier industrial scene and has somehow missed the Internet era. The second is that, in an industry dominated by nearly stateless multinationals such as LM Ericsson, Nokia and Nortel Networks Corp., Alcatel is, well, too French.While there are elements of truth to these perceptions, they are also out of date. Little illustrates this better than the events of May 4, when Alcatel simultaneously delivered record first-quarter growth -- powered by sales in Internet access products -- and revealed it would spin off its power cables business which will make it purely a telecommunications equipment player."I suppose I could tell you that in 1995 I was a sort of genius, having sensed there would be tremendous growth in the Internet," Mr. Tchuruk said during an interview at his company's headquarters just off the Champs Elysees. "But I don't dare tell you that because you wouldn't believe it," he added with a laugh.As to Alcatel's Frenchness, yes, clearly it's there. The view from Mr. Tchuruk's private dining room on the seventh floor offers a great view of the Eiffel Tower two kilometres to the south. And Alcatel, one of the country's most valuable firms, remains a pillar of strength on France's main stock exchange.But the French element in Alcatel is changing quickly. While 30 per cent of the firm's 118,000-plus workers are France-based, they will be joined in the next week or so by about 6,000 employees from Kanata-based Newbridge Networks Corp. which is being acquired as part of a $7.1 billion U.S. acquisition announced in February. Tomorrow, shareholders at both firms vote separately on the deal, which is expected to clear all regulatory hurdles some time next week. When Alcatel completes the initial public offering of its power cables unit, it will lose 18,200 employees, many of them in France.All of this, combined with continuing strong growth in the North American markets, will drive the percentage of French employees at Alcatel below 25 per cent. The anglicization of Alcatel really started in the late 1980s after it merged with U.S.-based ITT Corp, but it has accelerated with Alcatel's recent string of acquisitions in North America.Earlier this year, Alcatel declared that English would be its official language of business."We need a language that everyone understands," said Mr. Tchuruk, "It used to be that we would do our slide presentations to analysts in French and English, now it's just plain English."More important to Alcatel's health has been the remaking of the firm into a pure play manufacturer of telecommunications gear, an overdue transition that finally puts it on an even footing with rivals such as Nortel and Ericsson. It wasn't easy."When I landed at Alcatel, it was not even what you'd call a technology company," Mr. Tchuruk, now 62, recalled, "It was in transport, energy, turbines, you name it." At the time, sales of telecommunications gear made up less than 40 per cent of the firm's total -- and this division was in bad shape.There was no magic in Mr. Tchuruk's so-far successful push to turn the telecom group around. He sacked nearly 10,000 workers and increased the focus on each of the telecom sector's key product groups by urging his managers to adopt solid management techniques he had acquired during a stint with Mobil Oil Corp.Alcatel consolidated its overwhelming lead in submarine cable systems -- it had a 37-per-cent share of the global market last year -- and then successfully launched a new business in high-speed Internet access using digital subscriber line (DSL) technology.Mr. Tchuruk also drew on the proceeds of the sale of his firm's non-telecom units. He funnelled the money into R&D to correct Alcatel's weak spots, which include wireless handsets (an area now addressed through an alliance, announced earlier this month, with Japan-based Fujitsu Corp.) and an explosive fibre-optic niche known as dense wavelength division multiplexing (D-WDM).Mr. Tchuruk also supervised a $15-billion-plus acquisition binge that has seen Alcatel pick up seven North American telecommunications and data networking companies. The U.S. market alone generates one-fifth of Alcatel's sales, and the proportion is rising.Even so, North American analysts have been less than impressed with the acquisitions to date. Alcatel is well behind Nortel in key fibre-optic technologies. Nortel, for example, has had a 10 gigabit-per-second optical platform on the market for nearly a year, while Alcatel's version is only just entering serious trials.Alcatel's initial attempts at integrating its purchases into a smooth-running machine were also somewhat hamfisted, resulting in lawsuits by senior employees at Packet Engines Inc. of Spokane, Washington.However, European analysts tend to have a more benign view of Alcatel's track record, viewing the initial mis-steps as part of a necessary learning curve. "Nokia and Ericsson have been giving Alcatel an absolute tanning over the past five years in terms of performance and market capitalization," said Chris Lewis, managing director of research for The Yankee Group in Europe. "But you have to give Alcatel credit for taking the bull by the horns and pursuing acquisitions aggressively."Since mid-1995, Alcatel delivered shareholders a total return of only 170 per cent compared with 1,100 for Nortel and 608 per cent for Lucent. To which Mr. Tchuruk offers a couple of replies. First, he notes, what counts now is Alcatel's potential for capital appreciation -- indeed, in the week following the publication of Alcatel's first-quarter results, the firm's market value jumped nearly 20 per cent to $49.4 billion.Secondly, he believes "Nortel's hegemony in optics is a little bit exaggerated" pointing out that sales of Alcatel's fibre-optic gear should top $7 billion this year compared with $10 billion at Nortel.It's not just Mr. Tchuruk who likes his firm's prospects. In the case of Newbridge in particular, the view from the European financial district is starkly different from that of Wall Street, perhaps because European analysts who cover Alcatel haven't had to endure the frustration of Newbridge's many missed financial quarters. "This is one of the occasions when Alcatel is making an acquisition that will immediately and positively impact its profit margins," said Susan Anthony, an analyst with Paris-based bank, Credit Lyonnais.Mr. Tchuruk is not claiming he has solved Alcatel's problems. "No other company has a product portfolio as wealthy as ours," he said, "though I'm not yet in a position to say we are making superb use of it in terms of the bottom line."Indeed, Alcatel's operating margins last year were just 5.5 per cent of sales -- less than half the ratios enjoyed by Nortel, Lucent and Nokia.Driving up Alcatel's profits will be easier if its acquisition of Newbridge can hit the ground running. And there are signs Alcatel has learned from the experience of its earlier acquisitions.Not only have Newbridge and Alcatel set up numerous working groups to help smooth the transition, but Alcatel is giving Newbridge relatively free rein to run Alcatel's new data networking group."Alcatel has been adopting a real hands-off policy," said Ian Keene, a Europe-based analyst with the Gartner Group, "I think they've realized that if they try to integrate Newbridge too much, they'll smother it."When it unveiled the deal last Feb., Alcatel said it would create a new carrier internetworking division that Newbridge would manage. Now, with the sale of Alcatel's last non-telecom unit in prospect, the Paris-based outfit is set later this month to unveil a further restructuring, probably to give more focus to the firm's data networking efforts. This could give Newbridge an even bigger role in Alcatel's fight to break into Internet markets. The $5-billion-a-year unit wants to double sales within two years.Precisely what the new arrangement will be, Mr. Tchuruk isn't saying, at least not until the acquisition clears all the regulatory hurdles sometime next week.Nor is Mr. Tchuruk saying much about the role to be played by Newbridge chairman Terence Matthews, who will become Alcatel's biggest single shareholder with more than three per cent of the firm's shares. However, it's believed that Mr. Matthews may take part in a new advisory board of outside heavyweights who would periodically give Mr. Tchuruk their views on the state of the industry and Alcatel's place in it.For the moment at least, they probably won't be able to offer him much guidance; when Mr. Tchuruk unveiled his first-quarter numbers, he also substantially boosted his firm's sales growth projections for the year to 30 per cent. This means Alcatel is moving ahead substantially faster than the market as a whole.That would probably account for Mr. Tchuruk's good mood on the eve of realizing his company's biggest takeover yet. |
