End-2006 saw two telecom heavyweights ?? Alcatel and Lucent ?? enter into a $13.4 billion tie-up nearly five years after negotiations first began. While there had been widespread consolidation in the telecom industry, this was one alliance that stirred up high interest as it was expected to present stiff competition for players like Nokia Siemens, Motorola, Nortel and Ericsson.
The two companies seemed to have perfect synergy and were expected to bring to the table their respective competencies. While Lucent’s strength was in North America, Alcatel had a superior presence in Europe. Where Alcatel was big in the GSM and wireline segments, Lucent was dominant in the CDMA equipment space with close to 50 per cent global market share. Alcatel had expertise in broadband internet access gear, and long distance and high speed optical networks, and Lucent scored in the design and delivery of systems, services and software that would drive next-generation wireless networking equipment.
“For both companies, operational and production costs were a concern prior to the merger. So, the objective of the merger was pretty much the same for both companies in terms of future growth and the markets they wanted to cover. Rather than going individually to other markets, the companies decided to combine their synergies in the areas they covered,” observes Abhishek Kapoor, manager, advisory services, KPMG.
Their coming together, therefore, as Alcatel-Lucent, based in Paris, with about 79,000 employees (after the completion of the Thales transaction) and customers in 130 different countries was expected to create an entity that would be global in scale.As Alcatel CEO Serge Tchuruk put it while announcing the merger, it would bring on deck “one of the largest research and development capabilities in the world, and employ the largest and most-experienced global services team in the industry”.
However, eight months down the line (the merger was completed in December 2006) analysts are wondering if some of the sheen is fading. According to them, the continued struggle with the finer points of the merger has slowed down the pace somewhat.
This uncertainty stems from the fact that the company’s financial performance has slipped since the last quarter of 2006.Though the results for the quarter ended June 2007 show an improvement over the previous quarter there has been a significant decline as compared to the previous year.
The June 2007 results, for instance, show some key revenue streams taking a beating: the carrier business segment saw a 5 per cent decline at a constant Euro/USD exchange rate, from Euro 3,367 million in the quarter ended June 2006 to Euro 3,104 million in June 2007. Though the revenue from the wireline business has increased to Euro 1,505 million for the second quarter of 2007 from Euro 1,460 million in the corresponding quarter of the previous year, the wireless revenue has fallen from Euro 1,396 million to Euro 1,237 million.Likewise, the convergence business group has also registered a 27 per cent decline during the same period. The segments that have done relatively well are enterprise business and services, which have registered a 5 per cent and 7 per cent increase respectively.
As a senior analyst from Merrill Lynch notes, “Lucent’s CDMA business seems to have cratered in the December 2006 quarter. We also believe that Alcatel’s GSM and 3G business has suffered from customer spend delays due to 3G product roadmap uncertainty and margin pressures resulting from a very competitive GSM market.” He further adds: “Our case on Alcatel-Lucent was based on industry consolidation and achievement of cost cuts through synergies, leadership in wireline, recovery in wireless through significant share gains in 3G (from the purchase of Nortel’s 3G radio assets), and gradual declines in CDMA.”
Overall, as analysts see it today, although the expectation from margin expansion through synergy realisation and the company’s position on wireline strengthening is optimistic, there is still uncertainty over the company’s wireless business ?? both in CDMA and GSM/3G.
Company position
Company officials are, however, not overly anxious. Announcing the results for the quarter ended June 2007, Patricia Russo, CEO Alcatel-Lucent, stated: “The year 2007 is a transition year for the company as we continue to execute our integration plans in a rapidly changing industry. The gross margin was lower than we would have liked and was negatively impacted by continued significant investments in key markets, an unfavourable product and geographic mix as well as some impact from product-related transition costs of customers migrating their networks.”
However, it is not the indicative way forward. During the quarter, the company did reduce its cost expenditure in areas like information systems, IT and R&D. In addition, the company took care of problems associated with downsizing such as French union strikes. “We reduced approximately 1,900 positions (during the April-June 2007 quarter), before the impact of new managed service contracts and acquisitions (approximately 400 positions) are taken into account,” said Russo.Since the tie-up, the company has downsized by about 9,000 employees to bring it to the current level. “Having completed the largest merger in the industry, we are encouraged by the progress we are making with our overall integration plans and order flow,” Russo added.
This optimism is translating into definitive steps. For one, to do away with product overlaps, Alcatel-Lucent has decided to finalise its product and technology roadmaps and is currently in the process of communicating these decisions to its customers. This, it hopes, will help reduce any uncertainty regarding product plans.
Second, the company is getting more aggressive in securing contracts worldwide.This has led to a healthy momentum in building up its order flow. In the last six months, some of the key contracts clinched by it are with China Mobile Pakistan for expansion of its GSM network in northern Pakistan, and with Taiwan-based Chunghwa Telecom for providing Ethernet /MPLS-based solutions over a period of five years, involving an investment of over $180 million. For Telekom Malaysia, Alcatel-Lucent will supply a 10 gigabit IP/Ethernet network worth Euro 10 million and in the US, it has signed a threeyear $6 billion agreement with Verizon Wireless to provide CDMA2000 1x EVDO Rev. A, wireless transmission, IMS and IP routing solutions.
Wireline will clearly continue to be a focus area. Access along with IP-based DSLAM and optics (both terrestrial and submarine transport) are the segments that the company is looking at to step up revenue generation. According to an Ovum study report, Alcatel has outperformed other optical equipment networking vendors and has recorded sales worth $659 million and has an annual market share of 23.1 per cent (worth over $11.9 billion) jointly with Lucent.Triple play too is fast emerging as a prospective revenue churner. While focusing on emerging markets, Alcatel-Lucent has deployed the largest triple-play servicedelivery architecture (TPSDA) contract in the east African region. It will supply delivery systems for two regional communications giants, Kenya Data Network (KDN) and Celtel Kenya, under a threeyear contract valued at $18.8 million. Apart from these, it has also won TPSDA contracts to support IP video services for Portugal Telecom and Vodafone Portugal.
However, it is the recent $400 million contract with Reliance Communications (RCOM) that will see the real benefits of revenue synergies from the combined entity as it undertakes to expand both CDMA and GSM infrastructures to cover more than 20,000 towns and 600,000 villages in India.
The India chapter
With the Indian telecom equipment market projected to exceed 40 per cent growth rate in 2007-08, according to the Ovum study report, equipment makers worldwide are focusing on this market. For Alcatel-Lucent too, Asia is a key market, which contributes about 15 per cent to the overall revenues of the company.
Alcatel first made its appearance in South Asia in 1982, when it entered the Indian market through a technology transfer agreement with ITI Limited. It was the first company to manufacture digital switching equipment in the country. Lucent came a while later, in 1988, offering mobility, optical, software, data and voice networking technologies. Its area of focus, more specifically, was CDMA2000 1X, CDMA2000 1x EV-DO, UMTS, nextgeneration/softswitch, optical connects, broadband access and IPTV.
Till early 2000, the operations of the two companies individually were low key.However, with the Indian telecom sector ready to take off, over the next few years Lucent focused on developing its presence in the private sector with customers like Tata Teleservices Limited and RCOM, while Alcatel, through its transfer agreement with ITI, strengthened its position in the government sector.
Today, the industry is far more competitive. With over 6 million wireless subscriber additions every month and a teledensity of 20 per cent, India’s growth potential is immense. Driving the interest further are the massive expansion initiatives announced by service providers and the strong demand for innovative telecom services from enterprises. Alcatel-Lucent is all set to cash in on this. According to A. Sethuraman, chief marketing officer, Alcatel-Lucent, “All the latest technologies ?? be it 3G, Wi-Max, IP transformation, NGN, TV on mobile or IPTV ?? have a potential market here and are being rolled out by service providers.” At the same time, he realises that “the market is extremely price sensitive with tariffs being among the lowest in the world. The average ARPU hovers around $8, which requires low-cost solutions and new innovative business models to be considered.”
Thus, in the Indian context, the merger has been most strategic. The combined entity has already invested $1 billion and boasts of a formidable product portfolio comprising Gigabit Passive Optic Network (GPON), IPTV, DSL, CDMA2001 1x EVDO, GSM, EDGE, WCDMA, Wi-Max, Rev. E, IMS (IP multimedia subsystem), and payment, multimedia and next-generation network solutions.
The company plans to leverage on this for the $400 million RCOM deal, which is a major feather in its cap. Another key contract is Bharat Sanchar Nigam Limited’s 18 million GSM line deal. Apart from this, the company has bagged several transmission contracts from Bharti Airtel, TTSL, RailTel, etc. The current focus of the company is on the enterprise segment where it is servicing verticals such as banks (including RBI and ICICI), the railways and the defence services.
For Alcatel-Lucent, India has emerged as a major hub for research and development (R&D), a key activity for the company globally, that employs 23,000 R&D experts. In India, it has a workforce of over 4,000 and has set up major software development centres in Gurgaon, Noida, Chennai, Bangalore and Hyderabad. It has also formed a joint venture with the Government of India’s telecom R&D organisation, C-DOT Alcatel Research Center. In addition, the company has a Bell Labs research centre in Bangalore.
Its investments have already started generating returns. Recently, the C-DOT Alcatel Research Center successfully comAlthough the expectation from margin expansion through synergy realisation and Alcatel-Lucent’s position on wireline strengthening is optimistic, there is still uncertainty over the company’s wireless business ?? both in CDMA and GSM/3G.pleted the country’s first live Wi-Max IEEE 802.16e-2005 (also called Rev. E) field trial using Aircel’s licensed spectrum in the 2.5 GHz band. The trials successfully demonstrated applications in moving conditions such as video streaming, high speed file downloads, voice over IP (VoIP) and web browsing. According to AlcatelLucent, the technology is ready for commercial deployment.
Analyst views
Although the merged entity has been operational for eight months, industry observers are speculating on its performance. They point to some grey areas that the company may want to look at.For instance, Sourabh Kaushal, industry manager, ICT Practice, Frost & Sullivan India, says: “Looking at the deals that have taken place recently, we can hardly see Alcatel-Lucent anywhere on the scene. They are not doing well in the wireless segment and this is the segment that is going to create a greater impact in Indian markets in the coming time.Compared to Ericsson and Nokia Siemens, which have been big players in India, Alcatel-Lucent is presently nowhere in the lead in India.”
This is a cause for worry. The overall impression is that the company has missed the wireless bus.
Ravi Sharma, President, AlcatelLucent South Asia Regional Unit, doesn’t agree with this perception. “We are the only company with such a comprehensive range of products and solutions, and can meet the end-to-end requirements of any operator. In the transmission segment, we have done countrywide transmission and backbone, and access for Tata, Bharti and BSNL, which amounts to nearly 60 per cent market share. In the fixed line segment, there are 40 million lines. Between Alcatel and Lucent, we have installed 20 million lines. So, we have over 50 per cent market share in the segment. In wireless, our overall market share includes 13 per cent of GSM and 17 per cent of CDMA.This translates into around 30 per cent of the total wireless market. The adverse perception is because most of the time people consider wireless to be GSM only.That is why they take our share of GSM, which is 13 per cent, and compare it with the rest of the players. But wireless is not only GSM.”
However, analysts feel that the company needs to step up its pace to increase its market share. As Kapoor claims: “Compared to Nokia Siemens, AlcatelLucent is less aggressive. Its future standing will now by and large depend on how the Asian giants consolidate. They will have to fight the Asian vendors in the future. It is going to be a totally different ball game in the next five years.”
From a technology perspective as well, analysts feel that the company provides everything to everyone; there is a lack of a clear focus which may prove detrimental in the long run. Says telecom analyst Mahesh Uppal: “The fact that the company focuses on so many different technologies at once may lead to a conflict of interest between its various business segments. For instance, it is an active player in 3G and Wi-Max, which means that if it focuses on one, the other might suffer and vice versa.”
Sridhar T. Pai, CEO, Tonse Telecom, agrees: “Both the companies had multiple product lines that overlap, as in the case of broadband. After a merger it is common that some product lines have to be abandoned. Prior to the merger, Alcatel and Lucent had telecom and software relations with companies like Flextronics (now Aricent), Satyam, Wipro and Infosys.Now, when the product lines have been swapped due to the merger, AlcatelLucent has lost some of its customers.”
According to analysts, the impression also is that in India, Lucent was not an aggressive vendor and Alcatel did not carve a strong enough presence in the private sector. And this impression continues.
Company officials, however, think differently. True, Alcatel has for long had an overwhelming presence in BSNL and MTNL, but that situation is changing.The company is planning to diversify its presence further in the Indian market.While the company will continue to concentrate on providing mobility-based solutions to service providers, it is also looking at strengthening its Wi-Max, 3G and NGN offerings. According to Sethuraman, “These technologies are seeing a lot of traction now, and with a strong portfolio of solutions, we are well placed to tap this potential market.” The company also aims to achieve a leadership position in its convergence carrier business.
Future growth path
With the recent contracts under its belt, the company is very optimistic about the future. It expects sequential revenue growth over the year and a strong rampup in the second half of 2007.
Internationally too, the plan is to achieve “synergy-related pre-tax savings of Euro 600 million this year. However, during 2007, we are strategically reinvesting our gross margin savings to position the company for the long term, while achieVing most of our operating expense savings on a comparable basis,” as Russo puts it.
To sum up, Alcatel-Lucent is undoubtedly a strong player, combining the synergies of both telecom giants. With its current thrust on broadband, next-generation networks and Wi-Max, the company is readying to take on competition more aggressively in the years to come.
