Zeus Kerravala
Zeus Kerravala is the founder and principal analyst with ZK Research. Kerravala provides a mix of tactical advice to help his...
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Zeus Kerravala | August 04, 2008 |


The Industry Should Learn From Alcatel-Lucent

The Industry Should Learn From Alcatel-Lucent Earlier this week Alcatel-Lucent announced that CEO Pat Russo and chairman, Serge the Merge Tchuruk would be leaving the organization. The departures of these executives were no real surprise to people that have followed "Lucatel" since the two companies merged. Russo and Tchuruk were the main driving forces in the merger, which hasn't yielded near the results that they had initially predicted.

Earlier this week Alcatel-Lucent announced that CEO Pat Russo and chairman, Serge the Merge Tchuruk would be leaving the organization. The departures of these executives were no real surprise to people that have followed "Lucatel" since the two companies merged. Russo and Tchuruk were the main driving forces in the merger, which hasn't yielded near the results that they had initially predicted.

Earlier this week Alcatel-Lucent announced that CEO Pat Russo and chairman, Serge the Merge Tchuruk would be leaving the organization. The departures of these executives were no real surprise to people that have followed "Lucatel" since the two companies merged. Russo and Tchuruk were the main driving forces in the merger, which hasn't yielded near the results that they had initially predicted.This merger was doomed from the beginning and it should be a good lesson learned for the rest of the industry. In my mind, there are really only two reasons that mergers and acquisitions like this happen. One is to innovate and the other is to consolidate. Cisco is probably the king of acquire to innovate. Every acquisition that Cisco makes delivers new skills, technologies or capabilities that Cisco can move into its enormous distribution channel, and the majority of Cisco's purchases are successful.

Obviously, this type of merger doesn't always work. For example, Juniper acquired Peribit and Redline, which brought new technology to Juniper. Since then, Redline has been shut down and Peribit, despite how good that product is and how hot the market is, continues to struggle.

Acquisitions for consolidation purposes are done to take two smaller companies and make a bigger one with less net overhead than the two separate companies. The resulting merged entity has more market share with less overhead and can compete better. Make sense? The fact is that acquisition for consolidation rarely works as planned. Think back to HP Compaq. Similar to what happened to Russo, that merger cost Carly her job.

So let's look at the main reasons that I think consolidation purchases do not work. First, there are reasons both companies want to merge. Something has happened in the market to put both organizations in a position of weakness where they felt they had to merge. Think about it: if both Alcatel and Lucent had being flying high, there would be no reason to merge. Both companies would be more likely to compete than to merge. In this case, the market had transitioned away from many of the legacy products that both companies sold and was rapidly shifting to IP, which Cisco and Juniper dominate. The combined Alcatel-Lucent entity had a number of "next generation" products such as Alcatel's edge router, IMS systems, softswitches, etc but both businesses were in that 'transition' phase when the merger occurred.

Another difficult situation with acquisitions for consolidation is the complexity of the merger itself. If it's a consolidation play, then it's likely there is some product and R&D overlap. What products stay, which go, how does R&D gets structured, etc. In the meantime, while the restructuring is going on, often product innovation pauses while the company tries to determine how to rationalize the product set, what should stay or go, how it should be supported etc.

Culture always plays a role in large acquisitions. This happens more with consolidations since the two organizations are both likely to have its own culture that's well established. When companies acquire for innovation purposes, the acquired companies are often quite a bit smaller than the acquiring organization and it's easier for the company being acquired to adopt the culture of the "mother ship" rather than trying to convince a company that may have had some success on its own. In this case, it was a US company merging with a French company. At one time, Lucent was the darling of the US technology market and Alcatel has been that for France for a long time. Neither culture is better than the other -- they're just different. Getting US workers excited about working for a France headquartered company or vice versa is very difficult.

So you have two companies, headquarted on two continents, with vastly different cultures, going through the complexity of a merger in a transitioning market with customers that are also transitioning. That certainly does not sound like a recipe for success! If you look at many of the "consolidation" stories, many of them fail for the reasons I listed above. If they're going to work, the execution has to be perfect and it can't make up for years of companies being poorly managed.

I'm sure many of you reading this are thinking that this market does have to consolidate since we've got a consolidating customer base with all the telecom and wireless mergers. I agree that the market does need to rationalize down the number of players that are in it.

However, I do think we've had quite a bit of rationalization for consolidation already and its time this market started to rationalize through attrition and some of the weaker companies will start to die off instead of being brought into the fold of another weaker company. Moving forward, companies that are considering any kind of merger need to fix their own company before trying to integrate a second one into it. Two guys with broken legs with a rope around them still can't walk very well.


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