2Q results: As bad as it gets; Amid layoff gloom, vendors need dose of strong medicine – Lucent to lay off 14,000

2Q results: As bad as it gets; Amid layoff gloom, vendors need dose of strong medicine – Lucent to lay off 14,000 – Company Operations

In what is the most damning evidence yet that the telecom industry has far to go before it hits bottom, three vendors said within a three-day period that they would be laying off a total of 28,400 people by the end of the year.

“Obviously they all goofed up big time in terms of gauging the [market] over the 12 to 18 months going forward from 2000,” said Jay Patel, senior analyst with The Yankee Group. “That’s the reason why we are in such a big mess here. But in terms of the overall restructurings, most companies have taken the appropriate measures by now, so it looks pretty good.”

At Alcatel, which said it would lay off 14,000 employees by the end of the year, the restructuring includes the departure of Chief Operating Officer Krish Prabhu. Prabhu, who was appointed to the board with the resignation and has been rumored to be a candidate to replace Lucent Chairman and CEO Henry Schacht, said he was leaving the COO post partly because of his performance.

“I feel myself that I am not meeting my own standards of executing my role as a COO, so after much anguish this past summer, [Alcatel Chairman and CEO] Serge Tchuruk and I concluded that the best thing for me is to relinquish this role, continue to be an advisor to Serge and the board, and to guide Alcatel on strategy and technology going forward,” Prabhu said.

At the same time, Prabhu said that after cost-cutting measures were in place, Alcatel would be able to recover.

Industry watchers also applauded Lucent’s decision to double its cost cutting, noting that the vendor is embarking on a long, albeit painful, road to recovery. At the same time, at least one analyst said the company could become a takeover target.

The company’s phase two restructuring will be delayed as Lucent renegotiates bank covenants that limit restructuring charges to $4 billion. Lucent’s proposed $7 billion to $9 billion charge in the fourth quarter would put it in violation of the present agreement.

“We’re not asking for more money,” said Schacht. “We’re asking for the flexibility needed to accomplish phase two.”

Lucent is likely to get a new deal, said Paul Sagawa, analyst at Sanford Bernstein. “I’ve never met a banker that wasn’t in favor of a company they lent money to cutting costs,” he said.

But according to Steve Kamman, analyst at CIBC World Markets, while Lucent hammers out an agreement, vultures may be circling.”We must note that Lucent now does face the potential risk of a predatory player buying a majority of that [bank] debt in order to force a restructuring,” Kamman said in a report. “We believe this would be difficult but note that this is now a meaningful risk for shareholders.”

While an acquisition is theoretically possible, almost all potential suitors’ stock prices are too low to make a bid, said Kenneth Leon, an analyst for ABM Amro.

“[Lucent] will come out of it, but it’s going to be Chrysler-like; it’s going to take a long time. But they are well-positioned with incumbent carriers, and those are the customers everyone wants.”

Publicly, carrier customers informally polled by Telephony said they are still confident Lucent can deliver products and services reliably. The vendor continues to win new contracts, although most of the contracts have relatively small dollar values.

“The real difficulty is that the market for their equipment is in the dumper,” said Steve Levy, analyst at Lehman Brothers. “Industry fundamentals have yet to hit bottom.”

That sentiment is being echoed by Tony Muller, COO of JDS Uniphase, which has announced 16,000 layoffs since the beginning of the year and is reducing manufacturing production to a single shift.

“We do not yet see any positive signs of a reversal of the downward trend in the industry,” he said. “We now expect first-quarter sales to be below our earlier guidance and we are not currently providing guidance for the first quarter or for future periods.” He also said the company “cannot be sure” if this is the end of the layoffs.

The danger for all vendors is the possibility of selling out their futures if massive layoffs slice into R & D and product development efforts.

“History shows that if you adopt these across-the-board cuts and you really don’t think strategically about the product implications of what you’re doing or the functional implications of what you’re doing, that’s the trap,” said Bob Fox, vice president of Mercer Management Consulting. “Because all you’ve done is downsize, and when companies do that, the way these voluntary- or involuntary-programs are structured, you lose a lot of good people. The real damage in many of these companies is going to come from losing the customer-facing, business development and service people that their large customers have come to rely on.”

Fox added that smaller companies like Sonus, which recently inked a deal with BellSouth Communications could pose a real threat to the traditional vendors in this environment.

Still, most seem to believe the trimming is just the type of strong medicine that’s needed.

“They seem to believe they’re taking a fresh look, and there’s still a lot of overhead,” Levy said. “To the extent they’re cutting into muscle, they feel they’re cutting into atrophied muscle.”

Tim McElligott, Donny Jackson, Glenn Bischoff, Kevin Fitchard and Toby Weber contributed to this story.

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