Business Blog: Hoover’s Business Insight Zone

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.

~

* 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.

~~~

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.

~~~

This time around, it’s Gary Forsee at the #3 US phone carrier, Sprint Nextel. This item from the Wall Street Journal’s DealJournal blog…

Sprint-Nextel: Anatomy of a Failed Merger

…details some of what went wrong in the deal — or rather, how the deal was founded on faulty premises to begin with. Instead of improving its operations, Sprint looked to bulk them up in a hurry by acquiring Nextel. This item from ZDNet’s Between the Lines blog…

Forsee out at Sprint

…highlights the ridiculousness of the company’s financial projections, which center on a non-GAAP measure called OIBDA (i.e. “operating income before depreciation, amortization, restructuring and asset impairments and special items”) — the poor relation of the likewise specious EBIDTA.*

Regular readers of the business news — and of this blog — could be forgiven if they initially thought that the headline was about Patricia Russo, CEO of Alcatel-Lucent. She’s not gone, yet, but don’t be surprised if she takes the fall for the bad news stemming from a merger that was ill-conceived from the get-go. And I doubt it will take another couple of years for her fate to unfold, as it did in the Forsee/Sprint timeline.

Mergers of big companies are always tricky. Desperation-induced mergers are toxic.

~

* During the height of the dot-com boom, when EBIDTA numbers were all the rage, Warren Buffett asked a germane question about what the real meaning of any earnings number could be after you subtracted interest, depreciation, taxation, and amortization from it. If I remember his words correctly, he asked, “Who do they think pays for all these things — the Tooth Fairy?”

Today’s Company of the Day is Research in Motion.

~~~

“Put the Blackberry down and back away!” Okay, we’re not quite to the point of armed intervention, but plenty of people do feel an obsessive connection to their BlackBerries. That’s just fine by Research In Motion, the Canada-based maker of the wireless e-mailing devices. The company was in the news again last week for all the right reasons when it announced boffo earnings and robust projections for the upcoming quarter. Considering that RIM’s revenues, profits, and profit margins have already risen steadily across this decade, that’s good news indeed. While RIM’s traditional stronghold has been among business users, an increasing part of its success is coming from the consumer side of the business; in the past quarter, for the first time in the company’s history, consumer subscriptions to the BlackBerry service grew even faster than business subscriptions.

While the BlackBerry was ahead of its time in delivering e-mail to mobile devices, RIM now faces stiffer competition from new generations of smartphones. To keep up its momentum in the face of these challengers, RIM is planning to introduce new software that will allow BlackBerry users to share calendars and other electronic files (including images and music as well as documents) while they’re on the go. This comes on top of RIM’s recent acquisitions of Ascendent Systems (voice mail and mobile telephony software) in 2006 and SlipStream Data (data compression and acceleration) earlier this year. BlackBerries also work in more places than ever, since RIM has expanded the geographic footprint of its services by partnering with wireless service providers across Asia, Europe, and the Americas. It’s a sign of the device’s broad success that many companies have now instituted “No BlackBerry” rules for meetings. Without rules like these, many BlackBerry users find that they just can’t tear themselves away from their electronic lifelines.

~~~

After yesterday’s entry, I was thinking more about the plight of Alcatel-Lucent and similarly challenged outfits that are trying to restructure their operations. The companies that spring to mind are Kodak (nearly done with its reformation), Ford (slimming down), and Countrywide Financial (no telling whether it will survive the mortgage mess). All of these companies face the challenge of dealing with large infrastructures that may no longer help them to address the needs of their customers. In some cases of restructuring, those customer needs — or even the entire customer base — changes quickly enough or radically enough that the company awakes to find itself in what is essentially a new marketplace.

Certainly this happened to Kodak, which had to come to grips with the revolution in digital technology that has swept through the world of photography in the past decade. It may be happening to Ford, which hasn’t shown any recent ability to turn out hit models one after the other, and which seems unable to engender anything like the customer loyalty it enjoyed once upon a time. Certainly Countrywide faces a very different mortgage landscape than it did in previous years.

In each of these cases, changes in the prevailing conditions of business have upended the organizational quality of these large companies. What I mean is that they may have been rightly organized for earlier prevailing conditions in the marketplace — surely they were, considering the huge profits Kodak, Ford, and Countrywide have made at times — but whenever they can’t keep their organization evolving in pace with the evolution of the marketplace, they’re bound to end up looking disorganized. In fact, they are disorganized, as far as making steady, healthy profits is concerned.

Which brings us back to Alcatel-Lucent. Waves of change in telecommunications technology and in the markets for telecom equipment are tough enough to negotiate. Now stack them on top of a decades-long legacy of the hugeness and bureaucracy that came with old-style telephone monopolies . . . and then square the result, since the combined company now must deal with the legacies of both Lucent and Alcatel. Oh, yes, and throw 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 would be tricky enough. But layer their legacy problems on top of one another and . . . you get the mess they’re facing now.

As I see it, maybe the biggest problem of this kind of disorganization is that when it prevails, enterprises can’t harness the talents of their members. This is true whether we’re talking about a Cub Scout pack or an NFL team or Ford Motor Company. Well-organized enterprises are worth more than the sum of the parts because they harness the great advantages that come from coordinated effort. Disorganized enterprises are worth less than the sum of the part because too many individuals are left to their own devices in terms of applying their talents to the company’s broader efforts. Being worth less than the sum of the parts is one of the reasons that all of these companies have laid off so many employees: when you’re that disorganized, you can sometimes do better at meeting goals of profitability and so on when you subtract people from the equation. That’s not to let management off the hook: the best-run companies, like Toyota and Cisco, have shown that they can operate very well in these supposedly broken industries, and they don’t face the prospect of laying off hard-working employees whose talents go unharnessed because of disorganization within the system.

Pat Russo has her work cut out for her at Alcatel-Lucent, because no silver bullet (like the ill-advised merger of Alcatel and Lucent itself) can fix the company. It took a lot of entropy, a lot of sub-optimal choices, and years of fealty to legacy decisions to get the Alcatel side of the business, the Lucent side of the business, and the merged company to where they are today. You don’t say “Hey presto!” and undo that caliber of a mess. No, you have to make hard decisions one by one that progressively enable more of the company’s talent to come online. Nothing else can transform a bloated, ineffective entity like Alcatel-Lucent into a successful competitor.