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Alcatel-Lucent faces tall task in Friday meeting with shareholders

Thu, 12/11/2008 - 7:10am
The Associated Press

New Alcatel-Lucent chief Ben Verwaayen faces a difficult job Friday as he tries to convince shareholders he can turn around the troubled French-U.S. telecommunications equipment maker the way he did BT Group PLC.

Verwaayen, credited with transforming the British telecoms company into a broadband internet powerhouse, will be expected to pull off similar results at Alcatel-Lucent SA, a company still beset by integration problems two years after its creation in a giant trans-Atlantic merger, analysts say.

Better integration of the company's two halves, a robust response to Asian challengers, and a clear strategy to cut costs are all elements of the plan that analysts hope to see detailed at the special meeting Friday, a little over three months since Verwaayen took over from departed CEO Patricia Russo.

"What I'd like to see is how Alcatel-Lucent is going to better integrate its businesses," especially its long-suffering North American operations, said Julian Watson, an industry analyst at London-based research firm IHS Global Insight.

Analysts agree the main problem facing Verwaayen is Alcatel-Lucent's wireless business.

Its main difficulty in North America has been the sharp slowdown in sales of a wireless technology known as CDMA. That technology was a money spinner for Lucent in North America but in recent years has lost the battle of standards to the European-developed GSM technology.

This led the company to slash its sales outlook and take a euro810 million charge in its second quarter accounts.

Asian competitors such as Shenzhen, China-based ZTE Corp. and another Chinese company, Huawei Technologies Co., have grown in strength and are increasingly proving fierce rivals for Alcatel-Lucent and other European equipment giants like LM Ericsson AB and Nokia Siemens Networks.

"Asian competitors are pressing in at all levels," Ovum RHK analyst Julien Grivolas said. "Especially in mobile, over the last two years there's been very strong pressure from Asian equipment makers."

Grivolas pointed to recent contracts awarded to Huawei by Canadian carriers Telus and Bell Canada, saying "For me this is very significant. Three years ago it would have been unthinkable for a Chinese competitor to be chosen for contracts like this."

He added the Chinese companies have an additional edge because their cost structure and access to capital are more favorable than Alcatel-Lucent's.

Another decision expected to be announced Friday is the sale of Alcatel-Lucent's nearly 21 percent stake in defense contractor Thales SA. Last month, the company said it was in exclusive talks with Dassault Aviation on a sale of the stake for euro38 ($48.25) a share, which values Thales at euro7.54 billion ($9.57 billion).

Alcatel-Lucent has been loss-making for the past seven quarters, stretching back to the company's 2006 creation through Alcatel SA's acquisition of Lucent Technologies Inc. for $11.4 billion. Since then the stock has lost 85 percent, compared to a 38 percent drop for Paris' blue chip CAC 40 index. On Thursday, Alcatel-Lucent shares traded down 2.4 percent at euro1.85 ($2.39).

Analysts say the problem is that the company is spreading itself thin and needs to narrow its focus.

Alcatel-Lucent has engaged in successive waves of restructuring, with the current plan calling for the elimination by the end of next year of 16,500 jobs out of a total work force which stood at 76,410 at the end of 2007.

The Alcatel-Lucent linkage aimed to boost margins through savings on expenses and research and development, while improving the joint company's pricing power with telecom operators, its largest customers.

But intense competition in the industry has meant many of the savings have been used on discounts passed to customers, and analysts have said Alcatel-Lucent has not coped as well as some of its competitors.

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