A Lengthy Honeymoon at Lucent?

The search for a new chief of Lucent Technologies started way back in

October, 2000. James McNerney Jr, a finalist in the race to head General

Electric, was contacted. He opted to run 3M instead. Intel and Nortel Networks

veteran David House politely declined. Nor could Alcatel honcho Krish Prabhu be

persuaded. Finally, on January 7, company veteran Patricia Russo, who only eight

months earlier took the No 2 spot at Eastman Kodak, agreed to step into the

breach.

Little wonder volunteers weren’t lining up for the job. A widespread

industry collapse, compounded by management missteps, had transformed the

once-hot Lucent into a corporate basket case. Lucent lost $16 billion in 2001.

And with the outlook remaining gloomy for the telecom-equipment market, the

stock has lost 90% of its value since late 1999. As it hastily unloads assets,

Lucent’s goal for 2002 is merely to break even.

Still, as bleak as Lucent’s situation now seems, Russo, a 19-year veteran

of AT&T and Lucent, may have been dealt a better hand than most believe.

Interim CEO Henry Schacht has already done most of the dirty work. Since

returning to the helm in October, 2000, after the ouster of Richard McGinn, he

has shed unprofitable assets, revamped the product line, cut staff by more than

50%–some 65,000 jobs–and refocused Lucent on its traditional customer base

of telecom giants.

Even better for Russo, expectations for the company are at an all-time low.

With the big telecom-equipment buyers still scaling back their spending plans,

no one figures on seeing growth again anytime soon. The best most investors are

counting on is that the bleeding has been stanched. And most new CEOs get a bit

of honeymoon, particularly at companies as beaten up as Lucent.

All of which means investors won’t be looking for too much out of Russo’s

Lucent until late this year or early in 2003. And that’s just about the time

when many analysts expect the equipment market itself to finally start picking

up again. If Russo can control costs and convince customers to buy more from the

company’s revised product line, she could emerge from Lucent’s current

quagmire looking smart.

Of course, Russo must first deal with telecom’s dark days, which are only

going to get darker in 2002. In the boom years, capital expenditures rose at

annual rates of 30% or higher. Last year’s bust caused outlays to shrink 5% in

the US market. That’s nothing compared with the 30% drop in capital

expenditures an ABN Amro analyst expects in 2002, based on a poll of 300

carriers around the world. The problem: Demand for services has never

materialized at the rate the telecom industry was banking on. Revenue from new

data services should grow at only 15% this year, half the growth rate the

industry had long promised.

Simply to break even this year, Russo will have to keep a lid on costs even

as she jump-starts efforts to get sales growing again. Otherwise she may be

forced to cut even more jobs. And promoting the new optical, data-networking,

and wireless systems Lucent unveiled last November will be heavy slogging:

Competitors such as Cisco have products arguably as good or better for

comparable prices. But Russo is well-positioned to make Lucent’s case to top

telecom executives.

She has done it before. In 1992, she fixed AT&T’s money-losing office

phone business. At Kodak, too, she seemed to be making progress at a pretty

tough job. With a combination of fortuitous timing and skillful management, she

just might be able to do the same for Lucent.

By Steve Rosenbush with Geoff Smith in Boston in BusinessWeek. Copyright 2002 by The McGraw-Hill Companies, Inc