Alcatel-Lucent Merger Failure: A Critical Analysis

By Bill Nordick

1. Introduction

The level of competition in the global marketplace has become highly intensive and this fact is resulting in mergers and acquisitions between companies across countries and continents. There is no dispute that “mergers and acquisitions are a vital part of any healthy economy and importantly, the primary way that companies are able to provide returns to owners and investors” (Sherman and Hart, 2006, p. 1). However, in reality a range of issues may arise in mergers caused by cross-cultural differences, differences in management style, clash of personalities within senior level management and other reasons.

This report attempts to analyse issues associated with Alcatel-Lucent merger failure. The report contains analysis of factors that enabled the merger to take place and the analysis of performance of company in present. Moreover, discussions are provided about cross-cultural issues at Alcatel-Lucent and new challenges for the company in an international area are described.

Alcatel-Lucent merger failure

2. Factors that Allowed Merger in 2006

There were previous negotiation talks between Alcatel and Lucent in 2001 regarding the merger of the two companies. However, negotiations had failed due to suspicions of Lucent management that Alcatel was approaching the proposal like a takeover of Lucent, rather than ‘merger of equals’. The concept of “merger of equals” has been described as “a merger framework usually applied whenever the merger participants are comparable in size, competitive position, profitability, and market capitalisation” (DePamphilis, 2009, p.18).

However, some circumstances have changed by 2006 that resulted in renewed merger talks between Alcatel and Lucent. First, the level of competition in mobile telecommunication and internet industry has intensified and the two companies needed to merge in order to be able to compete with Chinese manufacturers and other industry leaders. Second, as a result of numerous negotiations between the two companies on top level Lucent senior level management were able to overcome their concerns regarding their stake of power within the new merged company.

Nevertheless, still concerns about the prospects of proposal in general and cultural compatibility between the two companies in particular were expressed from the various stakeholders of Alcatel and Lucent. The rationale behind their concerns was that “cultural differences have caused mergers to fail or prevented them from achieving their potentials. Cultural differences are almost certain to be involved when companies are combined” (Weston and Weaver, 2004, p.92). This issue was dealt with by Alcatel CEO Serge Tchuruk through insisting that provisions were made for all potential issues of such nature.

3. The Current Level of Alcatel-Lucent Performance

Alcatel-Lucent ran into serious issues as a result of clash of personalities between CEO Patricia Russo and fellow board member Serge Tchuruk and cross-cultural issues at various levels and the company had experienced six quarterly losses. After the resignation of Russo and Tchuruk in 2008, new executives were brought in to introduce fundamental changes to the company.

Both, Ben Verwaayen and Philippe Camus, had reputations for having good interpersonal and cross-cultural skills and it was also ensured that these two executives get along with each-other on the personal level. Moreover, Ben Verwaayen was a Dutch and Philippe Camus was French based in US and the choice of these personalities proved to be effective in terms of dealing with cross-cultural issues in Alcatel-Lucent.

Currently, Alcatel-Lucent is among the leaders in its market in a global level and had generated the revenues of 16 billion Euro with its operations in more than 130 countries (About US, 2011, online)

Having dealt with cross-cultural issues Alcatel-Lucent has adopted innovativeness as one of the main sources of competitive edge. Accordingly, the company has invested 2.5 billion Euros to research and development that has resulted in more than 27,900 active patents, with more than 2,400 patents obtained only in 2010 (Fact Sheet, 2011, online).

4. Cross-Culture Issues at Alcatel-Lucent

The statement “a giant transatlantic experiment in multicultural diversity” can be pointed to as a just description of the merger between Alcatel and Lucent, because the merger brought together two companies with dramatically different cultures.

Evidences that Alcatel-Lucent has run into cross-cultural problems since the merger took place in 2006 can be brought with the application of the Cultural Dimensions Theory, proposed by Geert Hofstede (2001) that divides cultures into five dimensions: power distance, uncertainty avoidance, individualism-collectivism, masculinity-femininity, and long-term vs. short-term orientation. Each components of the theory can be applied to the case of Alcatel-Lucent in order to study the issue in a greater depth.

Power distance deals with the perceptions of individuals regarding the nature of power distribution within a society. There are no dramatic differences in power distance in both French and US cultures where the power distance among superiors and subordinates are small. In some of the Asian and Arab countries on the other hand, superiors tend to distance themselves from their subordinates and tend to exercise their power in a more intensive manner.

There are differences between French and US cultures in terms of uncertainty avoidance cultural dimension. Specifically, the level of uncertainty avoidance higher in US, compared to France, and this fact can serve as a reason for cross-cultural misunderstandings at Alcatel-Lucent.

Individualism-collectivism cultural dimension “is used to measure the extent to which a culture values individual achievement rather than emphasizing the interests of the group (Tian, 2004, p.20). Both, US and France are considered to have individualistic cultures compared to Asian and Arab cultures. However, individualism values are even more signified in US compared to France and this can be mentioned as an evidence of existence of cross-cultural problems in Alcatel-Lucent.

As regards to masculinity-femininity cultural dimension it can be stated that there are considerable differences between France and USA that might have negatively affected the performance of Alcatel-Lucent since the merger took place in 2006. Specifically, the masculine elements of culture are valued in USA, whereas, France has femininity culture.

Cultures can also be distinguished in terms of short-term vs. long-term orientation. French culture is short-term oriented with people referring to their past glories and valuing their traditions as well as social obligations. Long-term orientation, on the other hand, applies to US, where according to the ‘American dream’ people can achieve everything they want in the future through hard work, dedication and luck.

It is clearly visible from the above points that there are great potential for cross-cultural misunderstandings at Alcatel-Lucent due to the vast amount of distance between French and US cultures. And neglecting these differences was one of the main reasons for the merger experiencing serious problems within its first two years of operations under the old management.

5. New Challenges for Alcatel-Lucent

The current management of Alcatel-Lucent was able to improve the performance of the company through addressing cross-cultural differences and other problems of the company in an effective manner. However, at the same time, the company is not ensured from the failures in the future, and therefore, must be proactive in terms of dealing with international challenges the company is faced with. The most important of such challenges can be summarised in the following two points:

Firstly, increasing rate of technological developments. According to Ball and Ball (2005) the life cycle of most types of products have decreased significantly and companies choosing to ignore this fact risk becoming a history. As it has been stated above, Alcatel-Lucent is currently investing significant amount of financial resources for research and development purposes, however, this amount should be increased even more if the company intends to remain among the leaders in its marketplace.

Secondly, competition from Chinese manufacturers. China is exploiting its global competitive edge of cheaper workforce and other resources to the full extent and presenting a real threat to companies like Alcatel-Lucent who do not posses such advantages. Therefore, Alcatel-Lucent management should consider the options of offshoring some business operations to developing countries, so that operational costs of the business can be reduced and the company would be able to compete with Chinese manufacturers.

Alcatel-Lucent Merger Failure: Conclusion

The initial period of a merged company Alcatel-Lucent had been associated with six quarterly losses and a range of other inefficiencies caused by ineffective management and cross-cultural issues. However, cross-cultural issues were dealt with effectively by the new senior-level management who took over in 2008 and the company started to make profits and increase its market share.

Nevertheless, there are still many potential issues that require attention from management as well as effective strategies to deal with them. From this viewpoint, Alcatel-Lucent management should adopt a proactive approach in terms of identifying potentials for obtaining competitive edge and using this potential to a maximum level.

Specifically, Alcatel-Lucent management should increase its focus on research and development, critically analyse possibilities of offshoring for cost-saving purposes, as well as form strategic alliances with various other businesses in a mutually beneficial way in order to achieve long-term growth of the company.


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Category: Change