As Lucent Technologies Inc Chief Executive Henry Schacht jetted back and forth across the Atlantic in April and May to negotiate a merger with France's Alcatel SA, dozens of employees at a company plant in North Andover, Massachusetts, were crocheting or playing cards.
They were killing time, waiting to learn who among them would be fired.
Lucent had put its entire workforce of 106,500 on notice in January, when it announced plans to eliminate 10,000 jobs in six weeks to help halt the company's long slide.
PHOTO: NY TIMES
In April, Lucent said that 800 positions at the factory 50km north of Boston would be part of the reductions.
``Work was getting really slow,'' says Paula Bianco, an electronics assembler at the factory who'd been advised to expect a pink slip. ``A lot of people sat around doing nothing. It was ridiculous.'' Bianco and 889 co-workers in North Andover finally got the bad news on June 1. By then, any hope of a quick solution to Lucent's woes had evaporated with the May 28 collapse of the Alcatel deal, following disagreements over representation on the post-merger board.
Without the merger, Schacht was left scrambling to get back on schedule with his promised cutbacks -- and to proceed with a second round that he says he began to plan for back in March. Once that round has become mostly complete by next January, Schacht will have shrunk the company by half in hope of emerging with a business that can operate profitably.
``A lot of things that might have been done earlier didn't get done until after the discussions stopped,'' Motorola Inc CEO Chris Galvin said during a July 31 analyst meeting. ``It set back their plans.'' Lucent has scheduled an analyst briefing of its own later today so Schacht can review the restructuring program and discuss the company's outlook.
Whatever he says, Lucent is a shadow of the company that so beguiled investors with its IPO in April 1996 and then beat earnings estimates 15 quarters in a row.
Lucent began to stumble in January 2000, when it announced that profit for the preceding quarter would fall short of expectations. Its biggest problem: The company had fallen behind Nortel Networks Corp and Cisco Systems Inc in developing new products.
Lucent's shares, which had reached a record US$79.58 in December 1999, traded as low as US$5.04 on June 20. The company's stock closed at US$6.68 on Aug. 22.
In its fiscal third quarter that ended June 30, Lucent had a loss from operations of US$1.89 billion on sales of US$5.82 billion, down 22 percent from a year earlier, when the company made US$776 million.
The months Schacht and his lieutenants spent on the Alcatel deal were crucial. Because they focused on the merger, the company fell behind in its cost cutting.
It also postponed asset sales and measures to streamline the product line, which had too many slow-selling and unprofitable models. The company put off plans for a second round of cuts as well.
``Clearly, the Alcatel discussions slowed us up somewhat,'' says Executive Vice President of Corporate Strategy Bill O'Shea. ``Time is money.'' One costly example: In March, when Lucent put its optical-fiber-manufacturing unit on the block, it drew offers as high as US$9 billion, according to a person familiar with the bids.
Schacht put negotiations with potential buyers on hold pending the outcome of the Alcatel talks. By July, when Furukawa Electric Co, Corning Inc and CommScope Inc agreed to acquire the fiber business, the price had dropped to US$2.75 billion, reflecting the declining value of fiber-optic companies in the wake of falling demand from telecommunications carriers.
To make up for lost time, Lucent had to act quickly to complete the US$2 billion in cost cuts that Schacht had promised. Management looked high and low for areas to economize. Lawns around the Murray Hill, New Jersey, headquarters were mowed less frequently and water coolers were removed from offices.
On April 24, the company disclosed that it had fired only 2,000 of the 10,000 workers. By the time it reported third-quarter earnings on July 24, Lucent said it had axed 10,500 workers and coaxed 8,500 into retirement with buy-out packages.
The same day, Schacht unveiled phase II of his restructuring, which will eliminate 15,000 to 20,000 more jobs. When it's over, Lucent will have eliminated as many as 49,500 jobs -- a 46 percent reduction from January 2001.
Schacht says phase II will take out another US$2 billion of costs and stop the bleeding that has drained US$2.5 billion in cash from the balance sheet in the past three quarters.
At that point, Lucent expects to operate profitably on revenue of about US$5 billion a quarter -- about half of what it pulled in at its peak, before it spun off operations such as its Avaya Inc office phone systems unit.
Phase II cuts include pruning about 30 of Lucent's 200 product lines and reducing capital spending by US$750 million.
Schacht insists the company will turn a profit sometime in fiscal 2002.
The CEO says he knew that the phase II measures were needed by late March, when he realized his January plan to reduce the head count by 15 percent, sell businesses, reduce working capital and subcontract more manufacturing was insufficient.
``We decided to resize the company to more appropriately fit the market, which is much smaller than we originally thought,'' Schacht says. ``At that time, Alcatel came up.'' Now, he is presiding over bigger cuts on a tighter schedule. If the phase II reductions -- in both personnel and research -- are not done carefully, O'Shea says, the company could stumble in its effort to develop the products to win back lost customers and nail down new ones.
Lucent has already made some progress. ``In some of my discussions with them, I'm encouraged,'' says Bob Azzi, vice president of engineering at Sprint Corp, a Nortel Networks and Ciena Corp. customer that is now considering some of Lucent's fiber-optic gear for possible trials. ``Up to this point, the equipment we needed wasn't available when we needed to make a purchase decision. It didn't have the attributes we were looking for.'' Sprint is an important customer this year because it's among the few carriers to have boosted its equipment budget.
Most others drastically cut their budgets.
Neither the size nor the risks of the restructuring seem to faze Schacht, 66, who says Lucent remains a routine turnaround.
``This is territory that I know very well,'' he says.
In the 1990s, Schacht won fame for the revival of Cummins Engine Co (now Cummins Inc), which named him CEO in 1973. To fend off Japanese competitors such as Nissan Motor Co, he slashed prices on diesel engines, leading to losses in six out of seven years.
After Schacht cut costs by 20 percent, the company turned profitable in 1992. He stepped down as Cummins CEO in 1994.
Schacht was tapped by AT&T Corp Chairman Bob Allen to oversee the rebirth of AT&T's Western Electric phone equipment business as Lucent Technologies in 1996, and he retired two years later. He returned as chairman and CEO last October, after the company missed its own profit forecasts in three of four quarters under Schacht's successor, Rich McGinn.
By the time Lucent's board forced McGinn's resignation and brought back Schacht, the company was hemorrhaging.
Profit in the fiscal year ended Sept 30, 2000, fell by half to US$1.68 billion -- even though the telecom equipment market was still growing at a 40 percent annual clip.
The widely-held stock had plummeted by 61 percent in a year, wiping out US$104.2 billion of market value.
To reverse the slide, McGinn had already laid out plans to sell or spin off businesses to focus on making transmission and switching equipment for phone companies. He spun off Avaya in September 2000, and he had already announced his intention to spin off chip-making subsidiary Agere Systems Inc.
By the beginning of this year, Lucent's woes were compounded by a contraction in the industry. With the economy stalling, major telecommunications carriers such as Verizon Communications Inc pulled orders, and smaller ones started to fail, leaving bills and debts to Lucent unpaid.
ICG Communications Inc, for example, filed for bankruptcy protection in November while owing US$42 million to Lucent for loans it had taken to purchase equipment. The result: Lucent's revenue in the December quarter plunged 26 percent from the same quarter a year earlier.
Things only got worse. In part because the cost-cutting hadn't yet kicked in, Lucent ended the March quarter with an operating loss of US$1.26 billion and negative cash flow of US$1.55 billion.
To keep paying the bills, Schacht was forced to plead with Lucent's bankers in February for US$6.5 billion in loans.
All of this made a merger with Alcatel look like Lucent's best option. The companies were a good fit: Alcatel is a small supplier to the US wireless business, for instance, where Lucent is strong. And Lucent is a minor player in the European market for switching equipment, where Alcatel is the dominant supplier.
In addition, the companies identified US$5 billion in overlapping costs.
Once Schacht and Alcatel CEO Serge Tchuruk decided to pursue a merger in late March, Lucent's top management concentrated on closing the deal.
Executive Vice President O'Shea, Lucent's lead negotiator, met with Alcatel's then Chief Operating Officer Krish Prabhu at least once a week to review projections and coordinate the planned combination and spent hours in-between on preparation.
Also deeply involved were Schacht, Vice Chairman Ben Verwaayen, Executive Vice President of Corporate Operations Bob Holder, General Counsel Rich Rawson, Treasurer Martina Hund-Mejean and, eventually, Chief Financial Officer Frank D'Amelio.
Even when negotiations broke off, Schacht couldn't start on phase II immediately, because his executives had to focus on closing the June quarter. Then, negotiations to amend Lucent's loan agreements dragged on, further postponing the restructuring.
The company waited more than three weeks for permission from its bankers, getting the go-ahead on Aug. 16.
Schacht is winning approval from some investors for what he's already done. In the June quarter, the company consumed only US$110 million in cash, having cut US$1.3 billion in annualized costs in the first round of restructuring.
In August, it raised US$1.9 billion in a convertible-share sale, giving the company some breathing room for phase II.
``Henry is doing all the right things,'' says Eli Salzmann, research director at Lord Abbett & Co., whose Lord Abbett Affiliated Fund bought shares of Lucent for about US$6 each in June. ``He understands that Lucent isn't a growth company anymore.'' Nor is telecom likely to be a growth industry -- and that may stand between a shrunken Lucent and Schacht's targets.
By predicting a return to profitability next year, he's taking a stand almost no other executive in the industry has been willing to take. Executives at Nortel and Cisco Systems refuse such forecasting, citing the cloudy outlook for demand.
According to Merrill Lynch & Co, US phone companies will cut spending on equipment, software and services this year to US$87 billion, down 14 percent from a record US$102 billion last year.
In 2002, spending will fall another 12 percent to US$76 billion, Merrill figures. The company estimates that global spending by carriers will drop 4 percent in 2001 and 8 percent next year.
That leaves Schacht with little room for miscalculation. If Lucent doesn't meet its revenue targets or trims expenses too slowly, he may have trouble raising cash.
Lucent has no major businesses left to sell without cutting into its core, the equity markets are effectively closed to technology companies and Lucent's credit has been downgraded to junk status.
Forgotten in Schacht's success at Cummins is that it took him a decade to complete that company's turnaround.
Lucent shareholders are unlikely to wait that long.
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