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

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Last updated: April 11, 2019

Alcatel wasFrance’s second largest company in terms of market capitalization (after FranceTel). Formerly known as “Alcatel Alsthom Compagnie Générale d’Electricité”, Alcatel,managed to transform itself into a communications solutions provider. MC1 It was underthe leadership of Serge Tchuruk, a former head of the French petroleumpowerhouse TotalFina Elf, when Alcatel has divested much of its traditionalindustrial base to make increasing intrusions in the mobile and fixed telephonymarket, with a focus on ATM equipment and network integration, as well asmobile phones manufacturing.  Lucent, wasan American telecommunications equipment companyheadquartered in New Jersey, in the United States.

It was established in 1996,through the divestiture of the former AT Technologies businessunit of AT Corporation, whichincluded Western Electric and the worldrenowned Bell Labs.  The mergerInitially in2001, both companies tried to merge but failed to reach an agreement due topending questions related to on how much control will be given to Alcatel afterthe merge and political pressure from US officials regarding the potentialthousands 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 companyafter the merge and made clear that this was not a “merger of equals” butdefinitely a takeover. Despite the fact that by seeking to control Lucent,Alcatel was only exercising common sense having in mind the difficulties facedby another high-profile trans-Atlantic merger, the one that formed Daimler andChrysler (For months, German executives at Daimler headquarters in Stuttgartinsisted that the transaction was a “merger of equals.” The truenature of the deal emerged after red ink began flowing out of Chrysler andDaimler installed a German executive at the wheel of its new American unit).         However, fiveyears later, the two companies finally came to a mutual agreement that wouldallow for a merger, because additional conditions and negotiating factors haveemerged that were not present in 2001. First of all, Lucent management has nolonger the same concerns about who’s holding the power in the new formedcompany as these concerns became minor compared to other more importantfactors.

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Another important trigger to the agreement was the cost savings ofestimated $1.7 billion over 3 years subsequent to the merger. Most importantly,the two telecommunications giants would in a better position to use theircomplementary portfolio (Lucent’s U.

S. strength in the wireless business nicelycomplements Alcatel’s global footprint and its prowess in fixed-line and broadband)to respond effectively to the increased competition from the low-cost Chinesemanufacturers like Huawei and ZTE Corp., as well as the growing size and powerof competitors such as Ericsson, Nokia, Siemens and Nortel Networks. On the paperthis seemed to be a good commercial deal.

Alcatel with strong relationshipswith European operators would gain entry into the lucrative American market(where Lucent was already having strong ties with carriers), and the mergerwould make the combined firm one of the world’s largest in the world. After the mergerSubsequentlyto the merger, the company saw six consecutive quarters of losses and faced aterrible plunge in value, with its stock price decreasing by more than 60% intwenty-one months. In addition, 18 months after the merger, both the CEO andthe chairman stepped down.

 What didn’t work? In spite ofthe standard integration problems that most mergers face, some tough decisionsaround cost-cutting and the elimination of management and operationalduplications were not made in due time mainly because of divergence of viewsbetween the Americans and the French management (as every party was trying tosave jobs on their sides). Moreover, the company was failing to find the senseit needed and was not capable of building a common cultural stand that wouldallow the new conglomerate to strive and deliver value to its shareholders.Using the OrganizationalDNA framework we have discussed in the LPO course, we have tried to highlight withmore details the reasons that might have caused the merger failure in additionto the tough market conditions between 2006 and 2008 (Environment) and also thestrong competition from Chinese telecom equipment companies (Environment).  Strategic DesignIn our view,failing to revisit the strategic design smoothly and quickly as part of thepost-merger integration was one of the main reasons that lead to the mergerfailure. First, themanagement and operational duplications were not swiftly eliminated whichdelayed 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 twocompanies was huge with a lot of duplications and inefficiencies.

The delay inselecting the combined technology portfolio caused a lot of misalignment anddelays in the sales process and offerings for the company customers. There wereeven cases when different parts of Alcatel-Lucent were competing against eachother in contract tenders. This internal confusion in addition to thecompetition aggressiveness contributed to the price pressure that is crushingmargins and caused multiple customers (especially in North America) to leaveAlcatel-Lucent for other providers pursuing more consistent offering and betterpricing.Finally, keepingthe headquarters in France while the CEO was based in the United States was astrategic design mistake that should have been addressed quickly as part ofpost-merger integration.

The physical distance between the CEO and headquartersmade decision making process very slow and collaboration difficult between thetwo sides of the Atlantic. Power & PoliticsThe Power strugglethat happened in the initial 18 moths post the merger between the French Chairmanand the American CEO caused a lot of harm to the newly formed company. Theconfusion was about who was the captain of the ship as the CEO was consideredthe authority man in American culture while in European context, the Frenchconsidered the chairman as the boss. Tchuruk the chairman was not willing togive up power and he was keeping Russo the CEO from building her own team as hewon the right during the merger negotiations to hold a veto over anyoperational appointments made by Russo. In addition to the power struggle atthe very top, the executive committee created to make important decisions afterthe merge (with more than 14 members roughly balanced between ex-Alcatel andex-Lucent) slowed down the whole decision making process as each party wastrying to save jobs at their side of the Atlantic.

 Cultural differencesThecomplexity of the merger and the difficult market conditions were partlyresponsible for the failure. But analysts also saw the differences in theinternal cultures between the merged entities as one of the main reasons forthe failure. One of themain cultural gaps was how Americans and French think and operate business duringcrisis. Americans concentrate on the right sizing of the business, lowering thecost and cutting down the jobs.

Conversely, French seek assistance from thegovernment and their own banks. This cultural gap increased themisunderstanding between the CEO and the chairman and created more frictionwithin multiple layers in the executive management. Another gap wasdue to the way both companies used to operate and perform business; One washierarchical and centrally controlled, while the other was entrepreneurial andflexible. Lucent was the rigid one. From its AT&T monopoly legacy, itretained a command-and-control style, and even after years of restructuring,executives were so obsessed with cost-cutting that even the smallest purchasehad to be logged into a central accounting system. Alcatel, by contrast,operated almost like a loose federation, with country managers reporting littlemore than annual results to Paris.

Right after the merge, the initialdifferences in the way of managing and driving business started to slow downthe company and creating a very toxic atmosphere; the integration efforts thatwere supposed to be done to absorb both cultures and create a new reformedculture were slowed by the internal wars between the CEO and the Chairman. In September2008, both Pat Russo and Serge Tchuruk were asked to step out. The appointmentby the board of a new CEO with a Dutch nationality was a clear sign thatneutrality will be required in order to deal with the cross-cultural issues inthe company. Ben Verwaayen the appointed CEO understood clearly that thecultural shift was the biggest challenge and focused on building a new identityfor the organization.

In his initial plan, he put on five key targets: ·        Delivering on the benefits promised when the mergeroccurred; ·        Embracing “Open Innovation”; ·        Banishing the “us versus them” that wascomplicating the transatlantic relations and insisting that the company mustact as one; ·        Making executives accountable for the results; ·        Choosing the best people for positions regardlessof nationalities.A part of the work initiated onfixing the organization culture, the new CEO renewed and refocused thecompany’s stated values, identifying them as “Accountability”, “CustomerFirst”, “Innovation”, “Respect” and “Teamwork” (which was added to tackle theissues related to transatlantic work relations). to edit/not clear/ split in two sentences MC1

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