(Updates with closing share price in sixth paragraph.)
Feb. 8 (Bloomberg) -- As Alcatel-Lucent SA Chief Executive Officer Ben Verwaayen told board members this week he wouldn’t seek an extension of his contract, he threw them no less daunting a task than turning around the French telecommunications equipment maker: finding a successor.
The position has gathered little interest in the past six months as some board members informally sounded out potential candidates to revive the unprofitable Paris-based company, a job Verwaayen has failed at despite cost cuts, asset sales and firings, people familiar with the matter said.
Chairman Philippe Camus and the board want a European or American with a background in industry to help Alcatel catch up to rivals as carriers face tighter budgets, a person with knowledge of the matter said, declining to be named as the plans are private. Alcatel-Lucent trails Ericsson AB and Nokia Siemens Networks in profits and is up against Asian competitors, sluggish spending in Europe and rigid job protection in France.
“The next chief executive needs to be an ace French politician as much as a great CEO,” said Mark Hawtin, head of investments at GAM U.K. Ltd., which manages about $60 billion and is shorting the stock. “Alcatel’s future is a big and difficult problem because it’s the fusion of two national assets, with national security interests involved as well as French labor laws.”
Simon Poulter, an Alcatel-Lucent spokesman, declined to comment on the board’s discussions and the company’s recruitment plans.
The shares climbed 2.5 percent to close at 1.26 euros in Paris, valuing Alcatel-Lucent at 2.9 billion euros ($3.9 billion).
Alcatel-Lucent announced yesterday that Verwaayen had decided not to seek another term when his contract runs out in May. The 60-year-old will continue to run the company as the board looks at internal and external candidates to fill the position. The company hasn’t communicated whether it has set a deadline for the search.
Verwaayen arrived in 2008 to try to make sense of the company formed by the 2006 merger of Alcatel SA and Lucent Technologies Inc. The former BT Group Plc CEO followed Patricia Russo and Serge Tchuruk, who oversaw the combination but couldn’t translate billions of dollars of research to develop equipment used in the newest generation of wireless networks into profits.
Chief Financial Officer Paul Tufano has worked alongside Verwaayen to fix Alcatel-Lucent’s finances since 2008. He took on more responsibilities in the newly created role of chief operating officer last September.
The former industrial giant’s operations once ranged from spaceflight to cutting-edge theoretical physics. It still has units including a submarine-cable business that’s been in operation for over 150 years and established the first undersea telegraph link. It’s shopping that asset around for possible buyers.
Since the merger, Alcatel-Lucent has accumulated about 10 billion euros in net losses, while its cash reserve has diminished by 700 million euros on average annually. Verwaayen has undertaken a patents-licensing agreement, sale of assets such as the Genesys call-center software unit and a stake in French aerospace manufacturer Thales SA, and a plan to cut 5,500 positions -- yet still not enough to right things.
To gain time for the reorganization, Verwaayen in December pledged more assets and patents and set targets to improve profit margins by 2015 to convince Credit Suisse Group AG and Goldman Sachs Group Inc. to agree on a 2 billion-euro financing deal.
Once Verwaayen leaves, the top job will revolve around executing the three-year strategy he presented to the lenders, a person with knowledge of the matter said.
“We’re not going to cut the company up into pieces and put it up for sale,” Verwaayen said at a conference in Paris yesterday. “We have a coherent strategy, a plan, and we’re going to execute it whether I’m here or not.”
Ericsson, the world’s largest maker of wireless networks, last week reported sales that beat analyst estimates amid rising spending by North American wireless carriers. Alcatel’s revenue in that region, which accounts for 40 percent of its sales, grew 10 percent last quarter and will stay “very strong” this year, Verwaayen said yesterday.
Pulling a plan together and finalizing details of the loan brought disagreements between Verwaayen and the board late last year to a high point and spurred the directors to begin casting about for options as some members found the conditions too harsh for Alcatel-Lucent, according to people familiar with the matter.
The terms also came under scrutiny by the French government, which has a minority stake in the company. The state has pledged vigilance on decisions at Alcatel-Lucent after Socialist President Francois Hollande was elected in May after vowing to block “a parade of firings.” Industry Minister Arnaud Montebourg called Chairman Camus in for a meeting last year to discuss job-cut announcements made in July, a plan that has triggered strikes and calls for government intervention.
“What needs to really happen is harsh action -- Alcatel has to accelerate layoffs and cost cuts, but they may also need to rethink their portfolio,” said Alexander Peterc, an analyst at Exane BNP Paribas. “They’re closing down some operations, but it’s not the surgical action that we’ve seen at NSN.”
Nokia Siemens Networks, the venture between Finland’s Nokia Oyj and Siemens AG of Germany, announced plans in 2011 to slash 17,000 positions, or 23 percent of its headcount. As the shareholders intensified talks to end their six-year-old venture, according to people familiar with the situation, the most recent results topped the company’s forecasts with fourth- quarter adjusted operating profit of 14.4 percent of sales.
Alcatel-Lucent, which had sales of 4.1 billion euros in the fourth quarter for 72,500 employees, will have to eliminate more than 13,000 positions to catch up with Ericsson’s job efficiency figures, based on data compiled by Bloomberg.
“Changing management only prolongs the agony,” said GAM’s Hawtin. “I don’t see a solution.”
--With assistance from Adam Ewing in Stockholm and Matthew Campbell in Paris. Editors: Heather Smith, Kenneth Wong