Write-down by Alcatel reflects its lost value Charge an admission it overpaid for Lucent

Kevin J. O'Brien The New York Times Media Group
International Herald Tribune
02-05-2009
Write-down by Alcatel reflects its lost value Charge an admission it overpaid for Lucent
Byline: Kevin J. O'Brien The New York Times Media Group
Edition: 4
Section: FINANCE/BUSINESS

BERLIN --

Alcatel-Lucent, the French-American telecommunications equipment maker, on Wednesday took a euro 3.91 billion charge against earnings, its biggest ever, in an admission by its new chief executive of the company's shrunken value.

The one-time charge dragged Alcatel-Lucent to a fourth-quarter loss of euro 3.89 billion, or $5 billion, compared with a euro 2.58 billion loss a year earlier. The quarterly loss was the company's eighth consecutive since the $13.4 billion combination of Alcatel and Lucent in November 2006.
"This charge sends a twofold message," said Richard Windsor, an analyst in London for Nomura Securities. "One is that the execution of the Alcatel-Lucent merger has been a disaster. The other is that Alcatel significantly overpaid for Lucent."

Alcatel-Lucent's stock rose 3.6 cents, or 2.5 percent, on Wednesday to close at euro 1.50, as investors wagered the company, based in Paris, might be poised for a turnaround. Alcatel-Lucent has lost about euro 9.4 billion and has taken euro 7.9 billion in charges since the merger.

The company is reorganizing its 77,000-employee work force and trimming euro 750 million in operating expenses, including cutting 1,000 management jobs and 5,000 contractors. So far, the austerity measures have slowed but not stopped the deterioration of Alcatel- Lucent's business amid the economic downturn.

In the fourth quarter, Alcatel-Lucent's sales fell by 5.3 percent, to euro 4.95 billion, from a year earlier. In the division that sells equipment to phone carriers, which makes up two-thirds of Alcatel-Lucent's business, sales fell by 11.8 percent, to euro 3.3 billion.

Ben Verwaayen, a 56-year-old Dutchman, took over as chief of Alcatel-Lucent in September after investors ousted the merger's architects, Patricia Russo, from Lucent, who was chief executive, and Serge Tchuruk, from Alcatel, who was chairman. During an interview, Verwaayen said the charge against earnings was necessary to reflect an assessment of the company's true value.

The charge was made because Alcatel-Lucent's market value had declined below the value of assets on its balance sheet, Verwaayen said. The company's stock has fallen about 85 percent since the merger.

"This is a matter of being absolutely transparent," Verwaayen said. "We have been brutally honest with ourselves and have looked in the mirror and are doing what we need to do to go forward."

About two-thirds of the euro 3.9 billion charge stems from good will paid in the merger, Verwaayen said, with the rest reflecting lower values for outdated product lines.

Despite the declines in profit and sales, Verwaayen said the new focus on technologies like Long Term Evolution, a new superfast wireless broadband, would improve results. Alcatel-Lucent is also expanding its service business, and last year began managing the wireless network of the Indian operator Reliance Communications.

Alcatel-Lucent remains the global market leader in fixed-line networking equipment, Verwaayen said, and is among the top two producers of network routers using Internet protocol.

"I think we have the adequate cash and liquidity to execute our plan and continue to be a relevant player in this market," Verwaayen said.

Nicholas von Stackelberg, an analyst in Frankfurt at Bank Sal. Oppenheim Jr., said the record write-down was a positive step by Verwaayen, who as chief executive of the British phone operator BT built a reputation as a cost-cutter with the ability to pull off and sell a turnaround to investors.

"This latest charge is not all that unusual when a new boss comes in," von Stackelberg said. "Politicians do this all the time when they take over. It equates to blaming the situation on the previous management."

(Copyright 2009)