ALCATEL-LUCENT"S TROUBLED MARRIAGE

Boos and catcalls rained down on Alcatel-Lucent Chief Executive Patricia Russo as she addressed the telecom gear maker's annual meeting in Paris on May 30. "You should all be embarrassed," an elderly woman said, shaking a finger at the executives assembled in the cavernous Palais de Congres convention hall. "But Mrs. Russo seems totally at ease, exactly what you'd expect from an American businesswoman."

Alcatel-Lucent is in big trouble, and Russo is catching serious flak. In France, the 56-year-old executive is viewed with suspicion as the first American, and the first woman, to head a blue-chip French company. In the U.S., she's vilified by many former employees of Lucent Technologies, where as CEO she oversaw a brutal downsizing before its merger with Paris-based Alcatel. All that is driving speculation that Russo may be headed out the door.

There's no denying that the numbers look terrible. Since the 2006 merger, the $27.5 billion company has posted six quarterly losses and has taken more than $4.5 billion in writedowns, while its stock has plummeted 50%. "Nobody's happy with our 2007 performance," Russo acknowledges.

Alcatel-Lucent has doubtless had some bad breaks. Economic turmoil and tight credit have crimped spending by phone companies, and competitors such as China's Huawei are on the prowl. But other gear makers face similar problems, and they haven't fared as miserably as Alcatel-Lucent. Telecom investment worldwide is set to rise 2.5% to 5.5% this year, while Alcatel-Lucent predicts its sales will decline by "low-to-mid single digits."

The marriage of these iconic companies was never going to be easy. True, Lucent's U.S. strength in the wireless business nicely complemented Alcatel's global footprint and its prowess in fixed-line and broadband. But the cultures could hardly have been more different. One was hierarchical and centrally controlled, the other entrepreneurial and flexible.

What may surprise critics of France's hidebound corporations is that Lucent was the rigid one. An offspring of the AT&T monopoly, it retained a command-and-control style, and after years of restructuring, executives were so obsessed with cost-cutting that even the smallest purchase had to be logged into a central accounting system. Because most sales were to longtime customers, Lucent's marketing unit was weak. "It was a slow-moving ship with an entitlement mentality," says John Wright, a former Lucent vice-president who now works at Intelligent Compression Technologies, a Quincy (Mass.) software group.

Alcatel, by contrast, operated almost like a loose federation, with country managers reporting little more than annual results to Paris. And its marketing organization was 10 times larger than Lucent's, though sales were only about 50% greater. The French company had a deft touch with acquisitions, says Paul Lacouture, a former vice-president at Verizon Communications who worked with both Alcatel and Lucent before and after the merger. "[Lucent's] purchases didn't seem to go as well," he says.

Russo was under pressure to merge these organizations quickly to achieve $2.6 billion in efficiencies. Despite her tough reputation, Russo brought a more collaborative style to headquarters near the Arc de Triomphe. She learned enough French to make brief speeches in the language. And she surprised colleagues by dropping into their offices to talk--a contrast with the former CEO and current chairman, the coolly formal Serge Tchuruk.

A LOSS OF PRECIOUS TIME

Seeking to head off conflict, Russo set up a 14-person executive committee, roughly balanced between ex-Alcatel and ex-Lucent managers. Bad move. "We had monthly videoconference calls that would go on for three, four, five hours," recalls one participant. After 11 months, Russo cut the group to seven members, but valuable time had been lost. Customers, uncertain about the new company's products, were getting picked off by competitors, so Alcatel-Lucent resorted to deep discounts that ate up profits. Alcatel's loose management style, meanwhile, created its own problems. "Lucent had one accounting system, but Alcatel must have had 20," a former Alcatel-Lucent top executive says. The result: a steady drip-drip of profit warnings as problems came to light.

Not all the news is bad. On June 16, Alcatel-Lucent won a $1 billion contract with China Mobile, the mainland's biggest wireless operator. But profits from Alcatel-Lucent's U.S. cellular business are meager, and longtime customers Verizon and Sprint Nextel are shifting to new technologies where the company lags. Outside the U.S., Huawei has pulled nearly even with Alcatel-Lucent as the No. 3 supplier of GSM cellular networks. Now, Alcatel-Lucent is under attack in its traditionally strong fixed-line business as Huawei picks up key customers such as Britain's BT.

Can Russo hang on? Shareholders on May 30 voted to let directors remove the CEO by a simple majority rather than the previous two-thirds. The company described the change as a housekeeping measure, but it means the six former Lucent members on a board of 14 can't protect Russo if Tchuruk and others decide she should leave. Russo insists the board still backs her--and that shareholders should, too. "Our focus as a management team is on executing our plan," she says. "And we are aligned with the board on that plan." -With Olga Kharif