Introduction

Merger is not an easy task; particularly the companies under the merger exercise have different culture, business model and practices. The merger between Alcatel and Lucent is such a case. In this essay, the various issues related to the merger between the two companies will be discussed. Firstly, the factors that pushed the merger forward in 2006 (that are not present in the year 2001) will be discussed. Then, the development and progress of the company from the time of merge to 2011 will be discussed. Thirdly, the various cross-cultural issues happening in the company since 2006 will be outlined. Lastly, the international challenges facing the company in the future will also be discussed.

New conditions and negotiation factors pushing the merger of Alcatel-Lucent in 2006

In the year of 2006, the industry landscape is becoming more competitive, and the market share of both the company is shrinking seriously. Thus, the pressure to merge to save costs is becoming more intense. For example, it is mentioned that such a merger could result in roughly USD 1.8 billion saving as well as a reduction of staffs by 10%. Not only that, the revenue of the combined company can become more diversified (Abboud & Lublin, 2008). It is expected that the newly combined company can have a revenue spread across Europe, the US and Asia – which could bring more earnings stability to the firm. Not only that, another factor pushing for the merger is to enable both the company to share resources in various aspects of the business operation. It is hoped that the merger will enable the company to gain economies of scale, able to pool or spread out the research and development funds as well as to increase their global presence in the era of globalization (Colchester, 2010).

Not only is that, around the year 2006, both of the companies getting weaker and weaker as they are facing intense competition in the industry. Worse, the competition is becoming so serious that they companies are losing market shares, primarily due to the low costs competition from China firms (Scroxton, 2008). In addition to the fierce competition, the internet technology was changing in a very fast manner, urging to companies to revitalize to cope with the new industry landscape. There are also views that the demand in the industry is dropping. Thus, both of the companies are forced to come together as the entire industry is experiencing a painful and urgent consolidation.

Changes in the Industry and the Company since the Merger

In the year of 2011, the combined company is suffering losses and struggling its way out of huge losses. This can be seen from Figure 1 below. The stock prices of the company are dropping seriously since the merger. Apparently, the company is doing badly. In the following paragraphs, the various changes in the industry as well as the performance of the company after merger will be illustrated.

Figure 1: Stock Prices of Alcatel-Lucent from 2006 to 2011

Source: Corporate Website

After the merger, the cultural integration between the two companies is facing huge issues. Despite being a combined firm legally, the company is still acting as a divided Alcatel-Lucent, where the internal structure is still largely divided due to cultural issues. There are still huge barriers preventing the combined firm to reap the expected benefits from a merger exercise, and the talents and potentials of the company is not released. Apparently, workers are fighting internally instead of concentrating on improvement for better profits in the marketplace (Abbound & Silver, 2006).

The situation is becoming more serious until the top management involve in cultural conflicts are asked to leave the company. For instance, after a total of six consecutive quarters the company is suffering losses, the board decided that both Ms. Russo and Mr. Tchuruk should leave the firm. A new suitable successor should be found urgently. The board has the opinion that fresh beginning is required and the cultural conflicts between the top management must end (Daks, 2010). Before that, the transatlantic integration is slow and not performing. As evidenced by the dropping share prices, the market capitalization of the company has dropped from a total of $35.6 billion to less than $6 billion (Colchester, 2010). After the new successor is found, namely Mr. Verwaayen, the company engages in huge cost cutting activities (Abboud & Lublin, 2008). He successfully reduced the cost of the company as much as EUR 950 million, and had laid off more than 1000 managers in the process. Those unprofitable products are also cut down as those technologies are deemed out of date (Colchester, 2010). Today in 2011, the company is still involved in consolidation internally and is not yet set on a growth path to sustainable profitability and superior performance in the marketplace.

From another perspective, after the merger, the competition between industry players is becoming more intense. There are still too many players in the industry; even in the recent years it is found that consolidation is happening in the industry landscape (for example, between Nokia and Siemens). It is argued by industry researchers that Alcatel-Lucent has to face fierce competition from Ericsson, Motorola, Nortel Networks and Huawei Technologies. There are simply too many players chasing after too limited customers. The industry wide margin is deteriorating, and it is cited that even the strongest player, namely Ericsson, is suffering decreasing gross margins (i.e., slid to 37% in 2009 from 49% in March 2005) (Matlack et. al., 2008).

Critical evaluation of the Merger

In this section, the comment that the merger between Alcatel and Lucent is a giant transatlantic experiment in multicultural diversity will be evaluated. The comment is generally valid because as Alcatel is from France and Lucent is from the United States, there are bound to have cultural differences in integrating the company to work together. Both of the companies are of significant size, and worse, the companies are already so entrenched in the respective country, with different business practices and business model. There is effectively no such merger of such a gigantic scale before between companies across the ocean and thus, it is hard to predict if such a merger will be a successful one (Abbound & Silver, 2006). It is indeed an experiment as nobody had done that before (Scroxton, 2008), and viewing from the highly different culture and business model between the two companies, it is indeed true that the management is experimenting if such a merger can be performed successfully.

There are many evidences pointing to the fact that the merger is running into cross-cultural issues started from 2006. At the inception of the merger, the CEO of the combined firm, namely Ms. Russo is viewed negatively in France, as she is the first American, and the first women to head a blue-chip French company. There are also many instances where cultural clashes between Mr. Tchuruk and Ms. Russo are affecting the decision making and management of the company. The organization is effectively operating as separate entities even after the merger, as the workers cannot cope with the cultural differences from the other company. There is effectively little cooperation between the two block of workforce in the combined company. Analysts and external observers are even suggesting that the corporate culture of Lucent is not compatible with the business model of Alcatel’s French business model (Scroxton, 2008). There are also arguments on who should lead the company, as the workforces from previous Alcatel believe that French should lead the combined company. As the management from Lucent is handed the leadership position, there are a lot of psychological resentment from people within Alcatel. People are highly unhappy that the newly appointed CEO, namely Ms. Russo cannot speak French and is taking excessively high salary. As such, the cultural conflicts are costing the company a great deal of opportunities, time and financial resources.

Challenges of Alcatel-Lucent

In this section, the many issues or challenges facing Alcatel-Lucent in the future. Firstly, it is expected that the low cost competition from Chinese rivals will continue. Secondly, it is also expected that the internet technology will be changing fast and the trend of changes is hard to predict (Abbound & Silver, 2006). Not only that, the rivalry among the existing competition in the industry is also high, as there are approximately eight huge equipment makers in the information technology industry fighting fiercely for the market share, forcing the prices down in the marketplace. As discussed above, such a trend is causing the profit margin of the various industry players to decrease significantly. Not only that, as the competition is intense, the players must also involve in heavy capital expenditure to develop cutting edge technologies to keep up with the competition (Abboud & Lublin, 2008). According to the market observers, it is commented that there is too much overlap on the research, development, and the network roll out activities, causing even further pricing competition in the industry (Colchester, 2010).

However, there are mixed views if the industry market share will increase or contract in the future. According to Colchester (2010), it is expected that the global telecom equipment market is set to grow from EUR 133 billion to EUR 196 billion in 2013. However, it is also expected that even thought the market size might increase, there are too many players stuck in the industry, causing a gloomy outlook for the entire industry. The situation become worse when the analysis take the aggressive Chinese Huawei into consideration, whereby the company had just formed a U.S. beachhead lately after being chosen by Clearwire in the United States to supply networking infrastructure for some of its WiMAX projects (Veverka, 2009).

Conclusion

Overall, the merger between Alcatel and Lucent is a hard one, as the cultural differences are not something easy to solve. Secondly, even the merger between the two companies are successful, the gloomy industry outlook will cause the company to suffer great losses from competitive industry landscape. The future will be challenging for the firm.

References

Abboud, L., and Lublin, H. S. (2008, August 28). International Business: Quigley Makes Alcatel’s CEO Short List. Wall Street Journal (Eastern Edition), p. B.2.

Abboud, L., and Silver, S. (2006, December 4). Alcatel-Lucent Hits the Ground, Prepares to Cut Products and Jobs. Wall Street Journal (Eastern Edition), p. B.3.

Abboud, L., and Silver, S. (2007, October 4). Why It’s the Worst of Times in Tale of One Deal; Alcatel-Lucent’s Goals Prove Elusive as Margins Shrink; Can CEO Russo Hang On? Wall Street Journal (Eastern Edition), p. B.1.

Colchester, M. (2010). Alcatel-Lucent Changes Its Way of Thinking; Alcatel-Lucent CEO Sheds Businesses, Pushes Workers at The Telecom Equipment Giant to Shed Their ‘Silo Mentality’. Wall Street Journal (Online), pg. 15.

Daks, M. (2010, February). Russo: M&A funding still out there. NJBIZ, 23(6), 3.

http://www.alcatel-lucent.com/wps/portal/AboutUs/Overview/

Matlack, C., & Schenker, J. (2008, June). ALCATEL-LUCENT”S TROUBLED MARRIAGE :The merger has yielded bad blood, bad earnings-and a threat to Pat Russo’s future as CEO.

Mumford, R. (2007, January). Alcatel-Lucent: Leader in Comms Solutions. Microwave Journal, 50(1), 42.

Scroxton, A. (2008, August). Business as usual for Alcatel-Lucent. MicroScope,7-8.

Veverka, M. (2009, August). Teaming Up to Battle Ericsson? Barron’s, 89(35), 32.