Lucent to Make Tough Choices to Survive

After rejecting a takeover by rival Alcatel, ailing Lucent Technologies Inc. is now in go-it-alone mode, leaving the company with little choice but to cut more jobs, scale back its product line and forge ahead with a tough-love restructuring plan, analysts say.

With the entire telecommunications industry in a pronounced financial slump, there is little chance of a new suitor emerging to swallow up Lucent, industry experts say.

Security concerns over sensitive technology at Lucent’s Bell Labs unit would likely prevent an overture from another foreign company, said Linda Varoli of the newsletter Merger Insight. In addition, “most of the other companies are not in any shape to be running out and doing an acquisition,” she said.

“Lucent just has to clean its own house rather than waiting for some one to acquire it,” said Ken McGee of the Gartner Group research firm.

McGee and others believe that means embarking on a ruthless assessment of what products and businesses Lucent needs to keep for long-term survival.

Lucent has already embarked on an aggressive restructuring plan it announced in January, but analysts believe the company needs to do more--and fast--to dispel the smell of desperation that came with Lucent’s unexpected move to sell the company outright.

“The medicine they need to take is not going to be very pleasant, but they need to go on a serious diet in terms of its cost structure,” said Roger Wery, telecommunications director at PRTM, a Mountain View, Calif.-based technology consulting firm.

The communications equipment company, hobbled by losses, heavy debt and weakening sales, had been in talks to merge with Paris-based Alcatel for weeks. But negotiations over the possible $22 billion to $25 billion deal collapsed Tuesday when Lucent refused to cede control of the combined company to Alcatel.

Murray Hill, N.J.-based Lucent and Alcatel issued a terse joint statement Tuesday saying their merger talks had to be “terminated.” In New York Stock Exchange trading Wednesday, Lucent shares dipped 18 cents to close at $8.14, while Alcatel shares fell $2.42 to $24.99 on news that the company will post a wider than projected loss for the current quarter and undergo further restructuring.

Wery noted that an ownership change would have smoothed the way for tough choices at Lucent. But company managers can now credibly use the prospect of a sale to motivate workers. “Now they can say ‘If we don’t move fast enough, if we don’t make the changes, this [merger] is what could happen,’ ” Wery said.

Under the already-announced restructuring plan, Lucent said it will cut more than $2 billion in annual expenses, chop more than 10,000 jobs from its work force, reduce capital spending by $400 million this year and expand the use of contract manufacturers, among other steps.

Henry Schacht, Lucent’s new chairman and chief executive, announced in late April that the company has made progress toward a rebound, but the current fiscal year will be a “rebuilding” year for the firm.

For the first half of the fiscal year, Lucent lost more than $4 billion amid heavy restructuring costs and debt payments, along with lower revenue because of slowing demand for communications equipment.

The company is under pressure from lenders to raise billions in cash to bolster its shaky credit standings. That means Lucent must make good on its promise to sell its fiber-cable business, which is expected to attract bids from rivals worldwide.

Analysts point out, however, that Lucent’s problems are largely financial, and that its product line is relatively strong compared with others. Lucent’s key weakness--not having a solid offering in Internet-style switches--is one that is shared by many of its rivals.

Stephane Teral, director of optical transport research at the telecommunications research firm RHK, remains somewhat bullish on Lucent’s prospects, pointing out that the slow down in equipment purchases will buy time for Lucent to bring its Internet protocol products up to speed.

“Obviously, they need to find some cash to sustain operations, and they still need to restructure,” Teral said. “It may take more time to put the company back on track, but I am not expecting Lucent and Bell Labs to disappear from the landscape.”