Alcatel faced by another high-profile trans-Atlantic merger, the

Alcatel was
France’s second largest company in terms of market capitalization (after France
Tel). Formerly known as “Alcatel Alsthom Compagnie Générale d’Electricité”, Alcatel,
managed to transform itself into a communications solutions provider. MC1 It was under
the leadership of Serge Tchuruk, a former head of the French petroleum
powerhouse TotalFina Elf, when Alcatel has divested much of its traditional
industrial base to make increasing intrusions in the mobile and fixed telephony
market, with a focus on ATM equipment and network integration, as well as
mobile phones manufacturing.

 

Lucent, was
an American telecommunications equipment company
headquartered in New Jersey, in the United States. It was established in 1996,
through the divestiture of the former AT Technologies business
unit of AT Corporation, which
included Western Electric and the world
renowned Bell Labs.

 

The merger

Initially in
2001, both companies tried to merge but failed to reach an agreement due to
pending questions related to on how much control will be given to Alcatel after
the merge and political pressure from US officials regarding the potential
thousands of job losses that the deal was expected to cause. From Alcatel side,
Serge Tchuruk, the CEO, refused to give up 50% control of the created company
after the merge and made clear that this was not a “merger of equals” but
definitely a takeover. Despite the fact that by seeking to control Lucent,
Alcatel was only exercising common sense having in mind the difficulties faced
by another high-profile trans-Atlantic merger, the one that formed Daimler and
Chrysler (For months, German executives at Daimler headquarters in Stuttgart
insisted that the transaction was a “merger of equals.” The true
nature of the deal emerged after red ink began flowing out of Chrysler and
Daimler installed a German executive at the wheel of its new American unit).        

However, five
years later, the two companies finally came to a mutual agreement that would
allow for a merger, because additional conditions and negotiating factors have
emerged that were not present in 2001. First of all, Lucent management has no
longer the same concerns about who’s holding the power in the new formed
company as these concerns became minor compared to other more important
factors. Another important trigger to the agreement was the cost savings of
estimated $1.7 billion over 3 years subsequent to the merger. Most importantly,
the two telecommunications giants would in a better position to use their
complementary portfolio (Lucent’s U.S. strength in the wireless business nicely
complements Alcatel’s global footprint and its prowess in fixed-line and broadband)
to respond effectively to the increased competition from the low-cost Chinese
manufacturers like Huawei and ZTE Corp., as well as the growing size and power
of competitors such as Ericsson, Nokia, Siemens and Nortel Networks.

On the paper
this seemed to be a good commercial deal. Alcatel with strong relationships
with European operators would gain entry into the lucrative American market
(where Lucent was already having strong ties with carriers), and the merger
would make the combined firm one of the world’s largest in the world.

 

After the merger

Subsequently
to the merger, the company saw six consecutive quarters of losses and faced a
terrible plunge in value, with its stock price decreasing by more than 60% in
twenty-one months. In addition, 18 months after the merger, both the CEO and
the chairman stepped down.

 

What didn’t work?

In spite of
the standard integration problems that most mergers face, some tough decisions
around cost-cutting and the elimination of management and operational
duplications were not made in due time mainly because of divergence of views
between the Americans and the French management (as every party was trying to
save jobs on their sides). Moreover, the company was failing to find the sense
it needed and was not capable of building a common cultural stand that would
allow the new conglomerate to strive and deliver value to its shareholders.

Using the Organizational
DNA framework we have discussed in the LPO course, we have tried to highlight with
more details the reasons that might have caused the merger failure in addition
to the tough market conditions between 2006 and 2008 (Environment) and also the
strong competition from Chinese telecom equipment companies (Environment).

 

Strategic Design

In our view,
failing to revisit the strategic design smoothly and quickly as part of the
post-merger integration was one of the main reasons that lead to the merger
failure.

First, the
management and operational duplications were not swiftly eliminated which
delayed the expected economies of scale as part of the merge ($1.7 Bn).

Secondly,
the consolidated portfolio of products generated by the merge of the two
companies was huge with a lot of duplications and inefficiencies. The delay in
selecting the combined technology portfolio caused a lot of misalignment and
delays in the sales process and offerings for the company customers. There were
even cases when different parts of Alcatel-Lucent were competing against each
other in contract tenders. This internal confusion in addition to the
competition aggressiveness contributed to the price pressure that is crushing
margins and caused multiple customers (especially in North America) to leave
Alcatel-Lucent for other providers pursuing more consistent offering and better
pricing.

Finally, keeping
the headquarters in France while the CEO was based in the United States was a
strategic design mistake that should have been addressed quickly as part of
post-merger integration. The physical distance between the CEO and headquarters
made decision making process very slow and collaboration difficult between the
two sides of the Atlantic.

 

Power & Politics

The Power struggle
that happened in the initial 18 moths post the merger between the French Chairman
and the American CEO caused a lot of harm to the newly formed company. The
confusion was about who was the captain of the ship as the CEO was considered
the authority man in American culture while in European context, the French
considered the chairman as the boss. Tchuruk the chairman was not willing to
give up power and he was keeping Russo the CEO from building her own team as he
won the right during the merger negotiations to hold a veto over any
operational appointments made by Russo. In addition to the power struggle at
the very top, the executive committee created to make important decisions after
the merge (with more than 14 members roughly balanced between ex-Alcatel and
ex-Lucent) slowed down the whole decision making process as each party was
trying to save jobs at their side of the Atlantic.

 

Cultural differences

The
complexity of the merger and the difficult market conditions were partly
responsible for the failure. But analysts also saw the differences in the
internal cultures between the merged entities as one of the main reasons for
the failure.

One of the
main cultural gaps was how Americans and French think and operate business during
crisis. Americans concentrate on the right sizing of the business, lowering the
cost and cutting down the jobs. Conversely, French seek assistance from the
government and their own banks. This cultural gap increased the
misunderstanding between the CEO and the chairman and created more friction
within multiple layers in the executive management.

Another gap was
due to the way both companies used to operate and perform business; One was
hierarchical and centrally controlled, while the other was entrepreneurial and
flexible. Lucent was the rigid one. From its AT&T monopoly legacy, it
retained a command-and-control style, and even after years of restructuring,
executives were so obsessed with cost-cutting that even the smallest purchase
had to be logged into a central accounting system. Alcatel, by contrast,
operated almost like a loose federation, with country managers reporting little
more than annual results to Paris. Right after the merge, the initial
differences in the way of managing and driving business started to slow down
the company and creating a very toxic atmosphere; the integration efforts that
were supposed to be done to absorb both cultures and create a new reformed
culture were slowed by the internal wars between the CEO and the Chairman.

In September
2008, both Pat Russo and Serge Tchuruk were asked to step out. The appointment
by the board of a new CEO with a Dutch nationality was a clear sign that
neutrality will be required in order to deal with the cross-cultural issues in
the company. Ben Verwaayen the appointed CEO understood clearly that the
cultural shift was the biggest challenge and focused on building a new identity
for the organization. In his initial plan, he put on five key targets:

·        
Delivering on the benefits promised when the merger
occurred;

·        
Embracing “Open Innovation”;

·        
Banishing the “us versus them” that was
complicating the transatlantic relations and insisting that the company must
act as one;

·        
Making executives accountable for the results;

·        
Choosing the best people for positions regardless
of nationalities.

A part of the work initiated on
fixing the organization culture, the new CEO renewed and refocused the
company’s stated values, identifying them as “Accountability”, “Customer
First”, “Innovation”, “Respect” and “Teamwork” (which was added to tackle the
issues related to transatlantic work relations).

to edit/not clear/ split in two sentences MC1

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