Business Insight Zone

Slightly over a year ago, I opined that “given [CEO Mike] Zafirovski’s long record of operational success, I’d say Nortel’s prospects are looking better and better.” That was in this post:

Has Nortel turned the corner?

A year later, the answer is a resounding “NO.” Last week Nortel reported a large third-quarter loss and announced that it would lay off 1,300 people. This is nothing new for the Canadian telecom equipment maker, which has all but trademarked the adjective “beleaguered” during this decade. From 2000 to 2007 the company lost a cumulative $37 billion on revenues of $111 billion — that is, it lost one dollar for every three it took in. Oh, it also shed 61,950 workers during that period.

By “contrast,” in the first three quarters of this year, Nortel has lost $3.66 billion on revenues of $7.7 billion. Yeesh.

For the morbidly curious: since the day I suggested that Zafirovski might be turning Nortel around, the company’s shares are down 97% — compared to 49% for the Nasdaq, 45% for the S&P 500, and 40% for the Dow Jones Industrial Average (chart).

What’s next for Nortel? Possibly being carved up for parts, as these two articles suggest:

• Network World: Where does Nortel go from here?
• Globe and Mail: Time for Nortel investors to face some hard truths

Sometimes, you’re better served to admit that victory will not be snatched from the jaws of defeat.

Killing the Grey Lady

Netscape impresario Marc Andreessen makes an excellent point in this Portfolio (via Wired) interview — which I recommend you read in full:

If you were running the New York Times, what would you do?
Shut off the print edition right now. You’ve got to play offense. You’ve got to do what Intel did in ’85 when it was getting killed by the Japanese in memory chips, which was its dominant business. And it famously killed the business—shut it off and focused on its much smaller business, microprocessors, because that was going to be the market of the future. And the minute Intel got out of playing defense and into playing offense, its future was secure. The newspaper companies have to do exactly the same thing.

Once upon a time I covered Intel for Hoover’s. (That duty now falls to Jeff Dorsch, who knows more about the chip business than I ever could.) During that time, I came to appreciate what a breathtaking move it was for Intel to abandon memory chips — but I hadn’t thought of the comparison to the New York Times or other papers.

The Monitor chooses the online option

An addendum to the interview notes that Andreessen said what he did before the Christian Science Monitor announced that it would stop printing its daily edition, so it’s clear that at least one old-line newspaper company is on the same, uh, page with Andreessen. The CSM’s decision was covered in another Wired item, which includes this choice quote from CSM advertising director Bob Hanna:

“Maybe the reason newspapers could go out of business is because they think they’re in the newspaper business instead of the news gathering and dissemination business. To hang on to a two century old technology just because that’s the way we’ve always done it, that’s a recipe for failure.”

This agrees with my own long-held view, which I expressed in a post in April of this year:

People in the newspaper business have made the fundamental error of thinking that they’ve always been in the news paper business. In fact, they’ve always been in the news delivery business.

Should Motorola kill handsets?

All of this was in my mind when I came across this GigaOm piece, in which Om Malik covers the horrific returns of Motorola’s handset business — $2.625 in losses since the start of 2007. After a commenter offered a mostly sensible-sounding prescription for restructuring the business, Malik responded thus:

My fix for this division – shut it down, save the money and move on to become a smaller and a better company.

The messages that Andreessen and Malik are delivering aren’t easy for their targets to hear, especially because both the New York Times and Motorola have such long histories of making lots and lots of money by doing things a particular way.

Old habits die hard. But sometimes you just have to put a business out of its misery.

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Related links:

• When is it time to kill a project?
• The news delivery business versus the news paper business.
• Marc Andreessen and Charlie Munger walk into a bar . . .
• “Circulation falls at many major newspapers.”
  

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Photo by Mark Coggins.

The other shoe finally, finally drops at the trans-Atlantic telecom equipment maker:

Alcatel-Lucent’s Russo, Tchuruk to Quit; Loss Widens

Alcatel-Lucent SA, the world’s largest supplier of fixed-line phone networks, said Chief Executive Officer Patricia Russo and Chairman Serge Tchuruk quit after the sixth straight quarterly loss.

The second-quarter net loss widened to 1.1 billion euros ($1.7 billion), or 49 cents a share, from 586 million euros, or 26 cents, a year earlier, the Paris-based company said in a statement today.

Russo and Tchuruk were the architects of Alcatel SA’s November 2006 purchase of Lucent Technologies Inc., creating a company that has never earned a profit, shed 62 percent of its market value and is eliminating 16,500 jobs. [. . .]

It’s not like we couldn’t see this coming. The merger seemed like a bad idea to many outside observers (including some of my colleagues here at Hoover’s) from the beginning. How was the combination of two bloated, slow companies — much less two companies with cultures forged on opposite sides of the Atlantic — supposed to compete with better with smart outfits like Ericsson and, above all, Cisco?

It never made sense . . . not that that stopped them from going ahead with it.

Now here’s the challenge of all challenges: if the combined Alcatel-Lucent never made sense, is there any leader or leadership team that can make sense of it?

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Related posts:

• Alcatel-Lucent and the right way to do layoffs.
• Alcatel-Lucent — Company of the Day.
• Disorganization Negates Talent.
• A quick summary of the telecom equipment sector.
• Alcatel-Lucent: Ou sont les synergies?

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Sprint’s stock has been taken to the cleaners because the company’s new CEO, Daniel Hesse, has taken the bold step of giving his honest — brutal — assessment of the company’s current and likely future performance. Two quick observations:

1. While it makes sense that investors would head for the exits after Hesse announced the company’s $29.5 billion loss, no one should act surprised about this performance. Sprint has been ailing for a long time now, as reflected in the musical chairs among its top executives and . . . well, take your pick of symptoms: the company has been stinking it up for a while.
2. It seems clear that the culprit for all of this is Sprint’s 2005 acquistion of Nextel. Again, no one should act surprised, since it’s well established that most mergers fail.

The lack of surprise didn’t keep analysts from coming up with artful ways to express the fresh dose of grief that Hesse laid down yesterday. I particularly like this paragraph from the New York Times story on the earnings announcement:

“No one expected Sprint’s results to be anything other than poor today, which makes the fact that they have managed to miss on virtually every metric a performance of some heroism,” wrote Craig E. Moffett, a senior analyst at Sanford C. Bernstein & Company. Further, he wrote, “the near-term contrarian argument of a turnaround — or, better, a strategic acquisition — remains highly speculative.”

So why do companies pursue deals like this? Well, have you ever made a move in life that left you holding your breath and hoping it would work out? “It’ll work out,” you tell yourself, “It’s just got to!”

Wouldn’t it be great if shareholders could count on better judgment than that from every high-powered executive? Unfortunately, they can’t, as this Knowledge@Wharton piece on failed mergers makes clear:

Wharton management professor Harbir Singh, who has done extensive research on mergers, says that the crucial distinguishing factor between success and failure in a merger is a sense of objectivity on the part of executives — a “realistic outlook” that needs to be maintained from the initial transaction through the entire integration process. The danger, it seems, is when executives “fall in love” with the idea of the acquisition, wanting it to work no matter what the cost.

Even executives are human: they see the potential upside of the deal — both for their company and for themselves — and their desire for things to work out overwhelms their better judgment.

Three Harvard researchers have come up with a list of “Nine Steps to Prevent Merger Failure,” from “no guiding principles” to “poor stakeholder outreach” to “cultural disconnect.” At least a few of these have affected the Sprint-Nextel combination, as the latest wave of reports on the company’s poor fortunes makes clear. What’s so sad (or enraging, if your an investor in the company) is that company management didn’t do more about them sooner.

Now for the bigger question — a theoretical one for you and me, but the make-or-break question for Hesse and his lieutenants: Can the patient be saved?

Ed Zander’s not really out, he’s just kicked upstairs to the chairman role while MOT long-timer executive* Greg Brown takes over the CEO duties. Two quick thoughts:

1. Yes, given my previous diatribes on this point, I’m pleased that the Motorola board believed that there was someone in the house — someone whose record sure looks like a future CEO’s record — to take over the reins. According to the company’s press release, Brown has “headed four different businesses at Motorola. He also led the $3.9 billion acquisition of Symbol Technologies” — on top of serving as president and COO until this promotion.
2. Ed Zander came into Motorola with a stellar record compiled at Sun Microsystems and as a venture capitalist. So here’s the question: is it that Zander just didn’t have the right answers for what ails Motorola . . . or is it that Motorola is now operating in a telecom market environment so different from before that the answers aren’t there?

Time will tell how Brown does. I’ll be watching with interest.

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* UPDATE: What with all the puffery in the press release, I misremembered Brown’s history with the company. As this post points out, he’s been with MOT only since 2003. Still, it’s better to have a medium-term insider take over the CEO reins than to have to turn to an outsider.

This follows up on an item we ran last week: GPS device maker Garmin has withdrawn its $3.3 billion bid to buy digital map database maker Tele Atlas, which ends Garmin’s bidding war with rival location-device maker TomTom.

The key influence on Garmin’s move seems to be the supply agreement it worked out with its current map supplier NAVTEQ (and by extension with NAVTEQ’s purchaser, Nokia) to supply Garmin with digital maps for many years to come. Apparently in this case Garmin decided that it was cheaper and better to strike a long-term deal with its current supplier rather than try to buy mapmaking capacity for itself.

But long-term issues remain, especially this one: if I’m going to own a smartphone anyway, and if that smartphone has GPS and mapping capabilities embedded into it . . . why would I need a separate GPS device from Garmin or TomTom? For more on this angle of the story, check out our post from last week, as well as this Bloomberg story (which was written before Garmin dropped out of the bidding war). The Bloomberg piece raises the specter that Garmin may suffer the same fate as Palm as more consumers move to smartphones that integrate many functions.

Garmin and TomTom are in a bidding match to buy the digital mapping outfit Tele Atlas.

Tele Atlas to review TomTom’s sweetened bid

Dutch digital map company Tele Atlas, which is at the centre of a bidding war between navigation device makers Garmin and TomTom, said on Wednesday it would review TomTom’s revised offer.

Tele Atlas said in a statement it had received the intended bid from TomTom, raised to 30 euros per Tele Atlas share from a previous 21.25 euros, valuing the company at about 2.9 billion euros ($4.2 billion).

If you haven’t been following this story, it has everything to do with Nokia’s recent agreement to shell out $8.1 billion (an amount that Nokia keeps in its checkbook for just such contingencies) to buy NAVTEQ — which has built the biggest digital mapping database and which competes head-to-head with Tele Atlas.

Conveniently enough, NAVTEQ topped our latest Hoover’s Index list, so we profiled it in both text and video on our Hoover’s Index page.

Garmin in particular doesn’t want to be put over a barrel by a NAVTEQ-owning Nokia. The cell-phone giant could make life difficult for the GPS device maker, especially since (a) Garmin currently pays to use the NAVTEQ database in its own navigational devices, and (b) Nokia has been introducing GPS-enabled phones that could eat up a chunk of Garmin’s turf.

What’s at stake in the future: more and better interactive wireless location-driven applications. At the moment, it’s easy to have your Garmin device or Nokia smartphone to show you the map for a particular address. In the future, it will be much easier to get an answer to fuzzier questions along the lines of, “Hey, we’re here in Minneapolis for the conference, and we want Chinese food — where can we get Chinese food around here?”

The beneficiaries: NAVTEQ and Tele Atlas, of course. Their products have value to begin with, but any product will command a higher premium when it has a very particular value to certain bidders. It’s a nice place to be in, if you happen to have a giant mapping database in your hip pocket.

Nortel Networks has been hurting for a while now, but I’ve long been convinced that Mike Zafirovski could be the person to turn it around. Mr. Z. compiled a great record at GE and (more briefly) Motorola before taking the top job at Nortel. Zafirovski is an operator deluxe, so much so that he’s often been called “Mr. Fix-It.”

The good news for Nortel is that it just reported a small quarterly profit. It’s only a 1% profit margin we’re talking about, but the company has also improved other operating measures, especially gross margins, that could point to future improvements. It will be interesting to see how the company builds on this quarter going forward.

Meanwhile, we can look back for various takes on the challenges Zafirovski and crew face, as they’ve been described over the past couple of years:

• October 2005: Nortel’s Mr. Fix-It: new CEO Mike Zafirovski is a turnaround heavy-hitter
• June 2006: Mr. Fix-It takes on his biggest challenge
• November 2006: Q&A with Nortel’s Mike Zafirovski. The Nortel CEO owns up to disappointment with margins and explains why the telecom equipment maker is stepping up investment in WiMAX technology

Especially good is the June 2006 article from the Globe and Mail, which opens by discussing the challenges Zafirovski faced as a teenage immigrant to the U.S. from Macedonia. It also includes this telling statement:

“He’s a great guy to be in a foxhole with,” said Boeing Co. chairman and CEO Jim McNerney, who worked with Mr. Zafirovski at GE Capital and GE Lighting and now sits with him on the Boeing board. “He’s one of those guys who is pretty fearless. People look at these big challenges and see the glass is half-empty. He’s one of these people who sees the glass half-full and is stimulated by it.”

Setting aside the mixed metaphors, McNerney is getting at something important: Psychological research (e.g. this) is showing that one of the greatest determinants for success is mindset. To take on the challenges of a behemoth/laggard like Nortel effectively, you must have the kind of outlook that McNerney describes. The right mindset doesn’t do the deal all by itself, of course, but given Zafirovski’s long record of operational success, I’d say Nortel’s prospects are looking better and better.

When we were discussing AOL’s layoffs a couple of weeks ago, a commenter named Jay said this:

One of the weird things about regular layoffs is that it creates a perverse incentive: Don’t fire your poor performers.

If you know that, within 12 months, you’re going to be asked to trim 20% of your team no matter how critical their work is, wouldn’t it make sense to keep a few people on your team that you can safely let go?

Exercise for the reader: Does this, in turn, foster the likelihood that the company will *need* to have another layoff?

Today’s news is full of stories on Alcatel-Lucent’s plans to lay off 4,000 employees. Worse than the news is how little surprise it provoked: the company has already announced layoffs of 12,500 people this year, it just reported yet another sizeable loss (and on declining sales — yikes), it’s still restructuring in the wake of last year’s merger, and various indicators suggest that the restructuring effort must become more radical, not less. Oh, and the market is shifting out from under the company, too.

As we’ve discussed before, the separate companies of Alcatel and Lucent needed serious cutting to rationalize operations before they merged. Given the inevitable redundancies in central-office staff, overlapping product groups, and the like, it’s no surprise that so many people have gotten the ax this year. It’s also little surprise to find out that there has been major infighting within the combined company as the French and American sides of it dig in their heels when it comes to deciding which are the redundant parts. (Who on earth could have seen that coming?)

Alcatel-Lucent’s case is and isn’t like AOL’s. The major difference is that the telecom equipment company completed its ill-advised merger in 2006, whereas the Internet company completed its ill-advised merger (into Time Warner, in case you’ve spent this decade on a desert isle) in 2000. What this means is that the bleeding at Alcatel-Lucent is urgent — it comes in obvious spurts. At AOL, the wounds are deeper, somewhat hidden, and they throb silently most of the time. The online company isn’t hemorrhaging, just slipping steadily into decline.

That steady decline underlies AOL’s habit — alluded to in Jay’s comment above — of cutting its staff year after year. Like the telecom equipment market, the space in which AOL plays is evolving, rapidly in some respects, more slowly in others. Like Alcatel-Lucent, AOL has been slow in admitting the severity of the issues it must confront. Possibly AOL’s leadership is just slow in admitting these things to themselves, as Alcatel-Lucent’s CEO Patricia Russo has been slow to admit (or to grasp) the magnitude of the problems that her company faces. The big difference is that Alcatel-Lucent’s dismal results have now forced a more urgent shakeup in how the company is organized and managed; AOL’s slow decline allows it to fall into the bad habit of self-inflicted death by a thousand cuts.

To its credit, Alcatel-Lucent is changing things from the top on down, cutting the size of its executive committee by two-thirds and simplifying its geographical structure. That simplification must accelerate if the company is to compete with the highly capable rivals (Cisco, Ericsson, Nokia Siemens) who have been feasting on its disarray. Likely it will mean more layoffs in the long run. (This story cites a telecom industry analyst who says that the company would have to cut a total of 30,000 workers — as against the 16,500 job cuts already announced — to be as efficient as Ericsson.)

Unlike AOL, Alcatel-Lucent does not seem to be stage-managing its layoffs — and let’s hope they never start to. Rather, they’re responding to pressing needs which, though they probably should have been obvious enough to act upon six months ago, at least are being acknowledged as essential now. With habitual layoffers like AOL, you’re justified in thinking that tending to p.r. has become more important to them than improving operations.

The best companies restructure every day. They build the whole business over, build it better, through every business cycle. Layoffs should happen all the time, too: person by person and team by team as performance and the needs of the company dictate. You only get into Alcatel-Lucent’s predicament through years of deferred decisions about the hard choices facing the business, a habit that is often tied to a company culture of ignoring reality.

Let’s hope that Alcatel-Lucent is finally facing up to reality. Layoffs are hard medicine, but they’re not as bad as collapse, which seems to be the alternative.

Today’s Company of the Day is Alcatel-Lucent.

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Question: What do you get when you merge two bloated, not-very-efficient companies (Alcatel and Lucent) that operate in a chaotic sector (telecommunications equipment) and lag far behind the industry leader (Cisco Systems)?

Answer: A bigger, more bloated, and still not-very-efficient company that lags far behind the industry leader.

Alcatel-Lucent took its current form in late 2006, when Alcatel plunked down $11.6 billion to buy Lucent in a merger that has not, shall we say, elicited cries of delight from both sides of the Atlantic. While advocates of the merger touted all kinds of advantages that would come from the combination of the two companies’ customer bases and technology portfolios, the unstated subtext — one that the principals behind the deal likely wouldn’t admit — was that misery loves company.

Despite the stoic efforts of CEO Patricia Russo and her team, the misery hasn’t gotten better since the two companies joined forces. While Cisco Systems keeps pacing the field in terms of both technology and financial health, Alcatel-Lucent has lowered its 2007 sales forecast three times. (One is tempted to add “so far.”) What’s holding up progress? Besides the usual tumult in the telecom equipment market — which, like semiconductors or biotechnology, constantly sees new technologies supercede old ones — Alcatel-Lucent must also deal with the overlong legacies of its predecessor firms, which could hardly help but inherit some of the bloat and bureaucracy of their old-style telephone company ancestors. Then, just for a garnish, you can factor in some trans-Atlantic cultural friction, too. Even if Lucent had been perfectly organized on its own (it wasn’t) and if Alcatel had been perfectly organized on its own (ditto), the combination of the two companies couldn’t help but be tricky. Layer the legacy problems on top of the cultural ones and the technological ones, and you arrive at the mess that Alcatel-Lucent faces now.

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