Despite Nasdaq’s recent jitters, technology mavens still see Internet infrastructure—essentially, the plumbing for the Web—as a fast-growing market with enormous potential. Along with Cisco Systems, the powerhouse of the networking world, Lucent Technologies and Norte! Networks Corp. dominate this market.
Recently, an interesting arriviste joined the crowd: Paris-based Alcatel. Five years ago the company seemed a sluggish, unfocused conglomerate serving the needs of state-run telephone monopolies adjusting to the demands of deregulation. Then, in 1995, Alcatel’s chairman, Pierre Suard, resigned under pressure amid allegations that he deliberately overcharged major customers. Later convicted of fraud, Suard received a threeyear jail sentence.
His successor, Serge Tchuruk, arrived in 1995 fresh from his virtuoso performance turning around Total (now TotalFina Elf), the French oil company. Tchuruk proceeded to sell off extraneous assets and focused the company on its wounded telecommunications equipment business, which put it right in the middle of the Internet infrastructure boom. He also moved to instill an American-style culture. English is now Alcatel’s official language, and most employees receive stock options as part of their compensation. Tchuruk made several acquisitions in North America, most recently paying about $7 billion for Kanata, Ontario-based Newbridge Networks Corp., a maker of communications switches.
But the company’s sailing has not been all smooth. In the fall of 1998, Alcatel warned that it would earn significantly less than forecast. Predictably, its stock plummeted, from the mid-30s to the teens. It has since recovered, trading recently at about 50. Now Alcatel must compete with powerful, established firms in North America to succeed as a global player. Tchuruk recently discussed these and other challenges with Institutional Investor Staff Writer Justin Schack.
Institutional Investor: What did you see as your mandate when you became CEO in 1995?
Tchuruk: Alcatel was seen as a company with an image problem. The former chairman was accused of misappropriating funds and had to resign. But the perception of the board and everybody else was that Alcatel was still a very strong technology and industrial company. Once I arrived and we looked at the business, it turned out that we had run into more serious problems. Telecommunications, which made up 59 percent of our revenues, was experiencing declining profitability. Perhaps even more important was the fact that we were beginning to have some problems with our key customers, the telephone operators that had been state monopolies but were facing new competition. That threatened our prospects for the future.
Why did you choose to focus solely on telecommunications?
I could tell you that I was a visionary and that in 1995 I suspected there would be a tremendous growth explosion in telecommunications. But if I were to say that, I’d be lying. Telecommunications was Alcatel’s biggest business but by far not the only one. And it was sick. It was really losing momentum. I realized if we did not correct the telecommunications problems, the whole company would drown. I decided perhaps 12 or 18 months later that the focus on telecommunications had to be exclusive, once we began to understand that the growth potential there would be just enormous.
Has it been difficult forging a common culture in light of all your recent acquisitions?
Alcatel traces its origin to the 1987 merger of ITT, the U.S. telecommunications conglomerate, and French manufacturer Cie. Générale d’Electricité. ITT was a set of geographic units spread all over the world but not necessarily run as a streamlined, verticalized organization. It was a conglomerate. So what I did was transform it into a more traditional structure—vertical segments with their own P&L—and achieved big cost savings. But I never tried to impose a single culture, because I don’t believe there’s one right style for a company to succeed. I tried to rationalize the structure while respecting the various traditions and cultures of the companies we were made of. The same thing holds for the acquisitions I’ve made. I’m merging some existing Alcatel operations into Newbridge, but, instead of imposing the Alcatel way of doing things on Newbridge, I’m using Newbridge as a development platform, a competence center and a worldwide authority on the switching business. When we bought four companies on the West Coast [Assured Access Technology, Internet Devices, Packet Engines and Xylan Corp.], I decided to merge those companies into one, run from the headquarters of Xylan, which was the largest. But I gave control of the business to Steve Kim, who ran Xylan, and allowed him to rationalize them into a single operation, another center of competence for Alcatel. We didn’t just send our managers in there to run the company.
Why is it so important for you to have a large U.S. presence?
One of our goals in fixing Alcatel was to shrink the company, to focus on just a few areas with good growth potential and relatively few problems. But we must also be a global company. The way telecommunications is developing, we had to either penetrate the U.S. market in a way that would make us a true global player or remain essentially a niche player and be vulnerable to bigger competitors. I believe we are breaking through, although it is taking quite a while.
How difficult has it been to impose a more American style on Alcatel?
Of course this was difficult, but it had to be done. I spent 16 years of my professional life working for Mobil Corp. To me, the American way of doing business is natural because that is the way I was educated. To succeed as a global company, to succeed in the U.S., we had to borrow directly from the American way of doing things. As a European company we reported financial results annually, but circumstances led us quickly to adopt quarterly reporting and to be much more transparent and forward-looking. In the U.S. people are very much interested not only in what you did last quarter but also what you’re going to do in the next quarter. So we had to educate our people to look forward as well, and that has made us more competitive. Borrowing from American ways also helped us in the area of compensation. We now make tens of thousands of employees eligible for stock options, instead of just the top management, and the reaction has been extremely positive in all of our geographic regions.
Do you see other European companies following Alcatel’s example in this regard?
It will happen over time, bur not until we see more European companies making the kinds of investments in the U.S. that Alcatel has. We now have $5 billion in sales coming from the U.S., which we built from practically nothing five years ago. Our clear objective is to be among the top three or four players in the world.
How can you take market share away from Cisco Systems, Lucent Technologies and Nortel Networks?
In certain vital sectors of the business, we think today that we are as good or better than many of our competitors. Take Internet access, whether traditional or wireless. On both fronts Europe is ahead in terms of technological standards, and our friends in the U.S. are out of breath trying to catch up. Optics is a huge growth segment of telecommunications, and we are today the biggest player outside of the U.S. We did have some weakness in ATM switching technology, and we acquired Newbridge specifically to strengthen our hand in that area. So when I look at everything that is in our hand, frankly, I am quite confident we can compete with Cisco, Lucent and Nortel.
Have you found it a challenge to get this message out to investors?
You have to keep in mind that not too long ago we were a conglomerate. Even as recently as 12 months ago, we had a nuclear power business. Until a few months ago, we were a company that nobody really understood. We now have a story to tell, and it’s probably better than many of our renowned competitors’. It’s probably going to take a while—maybe another six months of crossing the Atlantic and talking to analysts, talking to investors—to tell that story. But it is my very clear ambition.
Was it difficult to regain investors’ confidence after the profit shortfall in autumn 1998?
I think changing the way we report our financial results and opening ourselves to the American investment community has greatly improved the understanding of Alcatel and helped us regain confidence a bit. That experience reinforced in our minds that we had to make it our priority to maintain closer communications with investors.
What other geographic regions look attractive to you right now?
Our largest market has become the U.S. It represents 20 percent of sales, and that probably will go up to 25 percent in the near future. In comparison, sales in France are now 12 to 13 percent. And the Far East looks to be an area of growth right now.
Are there more acquisitions ahead?
Of course. It would sound presumptuous to say we have everything we need.
