Rapid change at Alcatel
By Caroline Daniel in London - Mar 30 2001 00:00:00
Six years ago, Alcatel was in crisis. Not only was it a sprawling French conglomerate, offering products from telecommunications switches to high-speed trains. It was also snarled in accusations of over-billing, misuse of corporate funds and the awkward fact that its chief executive was under house arrest.
Alcatel's turnround owes much to a bout of hard-nosed restructuring, as well as to some big technology bets paying off. The telecoms equipment sector is caught in a vicious downturn, which could yet affect the company. But Alcatel's story is a reminder that with hard thinking and a little luck, even the most difficult circumstances can be overcome.
The man who has presided over the rejuvenation - helped, admittedly, by a buoyant market - is Serge Tchuruk, a corporate outsider with little background in technology. He joined from Total, the oil company, in 1995 to sort out what he discreetly refers to as "les affaires". "At the time I said I'm crazy to have left a very comfortable job. So why the hell did I come and join?"
One of the first big decisions, other than massive job cuts, was to work out which of Alcatel's many businesses would become the core division. "The decision to focus on telecoms was not obvious. It was the biggest and sickest division," says Mr Tchuruk.
So sick, in fact, that it demanded attention. The business was haemorrhaging money and was focused on old-fashioned technologies, such as voice traffic, rather than data.
The turning-point came in 1998. Alcatel sold some of its diverse holdings, including part of its stake in Alstom, the engineering and power generation business. It also paid $4.4bn for DSC Communications, a US telecoms equipment company with a speciality in profit warnings.
At the time the deal was derided by some analysts. "It was seen as evidence Alcatel was an old-school, traditional company and as evidence that we had not realised what new markets people were looking at," says Mr Tchuruk.
Krish Prabhu, chief operating officer at Alcatel, who is based in the US, is even blunter. "DSC was seen as a dog from the standpoint of how it was performing in the US. The founder had overstayed his welcome and analysts had written it off."
Even so, DSC, with its wide network of US customers, offered Alcatel a crucial way to help sell its DSL line of products. This is a technology that boosts phone lines, enabling consumers to access the internet at higher speeds. Alcatel's development of DSL has underpinned its reinvention: the company has about a 54 per cent global market share in the area. "It is largely DSL that has created the image about Alcatel and its technical capability," Mr Prabhu says.
That achievement has been part luck and part design. In the mid-1990s the company hoped the technology would be used for video on demand (VOD) but this flopped.
Fortunately, Mr Prabhu says, about this time he was approached by a former customer in the US. "He said they were looking at DSL because internet data were clogging up their voice network . . . we realised we could reposition the VOD platform quickly for internet access. We did not know at the time the market could be this big."
According to Sean Faughnan, analyst at Goldman Sachs, Alcatel was lucky the internet took off. "There were a lot of people who had been sceptical the technology could work and that Alcatel could make a success of the business. Alcatel has proved the sceptics wrong."
But as the first pieces of the restructuring were falling into place, Alcatel blew it. In September 1998, three weeks after the deal with DSC, the company had what Mr Tchuruk obliquely refers to as "the big accident".
Alcatel issued a profits warning that sent the shares down 38 per cent. As Angela Dean, analyst at Morgan Stanley Dean Witter, recalls: "It destroyed management credibility. Suddenly people thought they had little control over the company."
The warning obliged the company to accelerate its revamp. It reoriented itself towards the financial markets, opting to report results quarterly. Managers became more hands-on.
"We saw the benefits of running a focused company, not a conglomerate," says Mr Tchuruk. To that end, the focus on telecoms - in particular on broadband products rather than traditional switching equipment - became even sharper through a series of acquisitions, culminating last year in the $7.1bn offer for Newbridge Networks, a Canadian maker of data switches.
But while acquisitions have been crucial to Alcatel's repositioning, the company has also developed strong technologies in-house, in particular in the area of optics, where it has a formidable workforce of 25,000 employees.
Last year marked the moment when the market started to take Alcatel seriously in optics, alongside Nortel, according to Christian Reinaudo, president of the optics group.
The strength of its optics work was underpinned by Alcatel's decision to issue a tracking stock for its optical components business, becoming the first-ever European company to adopt this approach. Many believe Alcatel made a mistake in not floating the unit. Mr Reinaudo concedes there were tensions between keeping strategic control or getting a higher valuation. But there were still benefits: "The visibility we got last year from the tracking stock helped contribute to the idea we were not some old dinosaur - and were able to fight in the new economy in the same way as a US company," Mr Reinaudo says.
The US acquisitions and the tracking stock have elevated Alcatel from a bit player in the US to a serious rival to Lucent and Nortel Networks. Yet, given the recent worrying performance of these big North American companies, that is hardly an enviable position to be in.
Evidence that demand for telecoms equipment has been hit hard by the slowing economy has been building for months. This week, Nortel Networks issued its second profits warning in a matter of weeks and said it might cut as many as 15,000 jobs. Demand for DSL has also slowed - a number of US service providers, including Northpoint Communications, have halted business.
Having suffered the ignominy of its profits warning in 1998, Alcatel has scaled back expectations, although not fast enough for some analysts.
"The US is obviously slowing. We have grown substantially in the US from 0 to 23 per cent [of revenues]. I'm extremely cautious in what I am stating now. Any word has to be carefully weighed," says Mr Tchuruk. "I still believe the first quarter will grow about 20 per cent. These days that is a good performance. I still believe Alcatel will grow in 2001, which is not a good year for the industry."
Alcatel remains confident it can withstand the slowdown. Compared with rivals such as Nortel, it is less exposed to the US. It expects demand for optical networking and DSL outside the US to hold up. The company also believes there is still plenty of growth left in DSL, even inside the US. "It will rebound because internet access offers one of the few sources of new revenue for phone companies," says Mr Prabhu.
But even as Alcatel has carved out a leading position in broadband access, it still has gaps, not least in broadband wireless technologies. As wireless and fixed communications start to converge, "not being a wireless player is a handicap", says Mr Prabhu.
Alcatel's fortunes in wireless technology have been mixed. About three years ago it tried to sell its handsets division because it lacked scale - but it failed to get a good price. More recently, those underlying problems have been masked by buoyant demand for phones, which helped drive Alcatel's sales to 20m in 2000. According to one investment banker, "Alcatel had offers to sell but declined because it thought it strategic."
The company must be ruing that decision. It has been hit by slowing growth in handsets and this month warned it would make a first quarter loss in them. Mr Tchuruk seems eager to sell. "Are we a long-term strategic player in handsets? I would not say so. We are launching GPRS handsets ... that being said, we are not Nokia and don't want to be a major player, so we are open to other alliances. It is already a standalone business."
On wireless infrastructure, too, Alcatel lacks scale. It is conservative about third-generation technology. Mr Prabhu doubts that the amount of money users are willing to pay for services could support "a major upgrade to 3G".
Alcatel cannot escape the downturn but neither can most of its peers. It is still weak in some areas but which company is not? That should not detract from its achievement. A few years ago, some argued that the business was emerging as the Lucent of Europe. Now, says Mr Faughnan, "the point to make is that Alcatel does not need to be judged by reference to a US stock. Now, others need to be judged by reference to Alcatel."
© Copyright The Financial Times Limited 2001.
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