Analysts: Lucent's management change should have come sooner

Today's announcement by Lucent Technologies Inc. that Richard McGinn had been ousted as its chairman and CEO came as no great surprise to analysts who follow the struggling networking technology vendor. But some said they remain concerned about Lucent's prospects because the company has yet to name a permanent replacement for McGinn.

As an interim step, Lucent named onetime top executive Henry Schacht to take over from McGinn while the company launches a search for a new CEO. The return of Schacht, who most recently was chairman of Lucent's Avaya Inc. enterprise networking equipment spin-off, followed lower than expected earnings in the company's fiscal fourth quarter and was accompanied by a warning of similar results in the current quarter ending in December (see story).

"There was little question that a shake-up at Lucent was in the works and that someone needed to be held accountable for the company's state of affairs," said David Willis, an analyst at Meta Group Inc. in Stamford, Conn. Lucent needs a CEO who can make some needed hard decisions, such as getting rid of unprofitable units and positioning the company to compete in the optical networking business "before it's too late," Willis added.

For users, Willis said, the big concern is Lucent could decide to jettison some of its less profitable products. "Look at what happened to 3Com," he said, referring to 3Com Inc.'s surprise decision earlier this year to phase out its enterprise switching business (see story).

In fact, Lucent late this afternoon said while reporting the financial results for its fiscal fourth quarter that a planned corporate restructuring will include "an intense review of [the company's] product portfolio to align resources against the highest-value opportunities." Other steps in the works include a consolidation of Lucent's corporate infrastructure and the implementation of a new order-processing system.

Jim Slaby, an analyst at Giga Information Group Inc. in Cambridge, Mass., said a management change was overdue at Lucent and McGinn "was standing closest to the window." Lucent's financial performance this year, and a resulting drop in the value of the company's stock, are "unconscionable," Slaby said.

"Lucent has always believed [it] invented fire," he added, noting the company's roots within AT&T Corp. before it was spun off as a separate company in 1995.

Slaby said that attitude, along with a disbelief on the part of Lucent executives that rivals such as Nortel Networks Inc. and Cisco Systems Inc. could quickly pass the company in the networking business, played a role in bringing Lucent to its current state.

Larry Hettick, an analyst at Tulsa, Okla.-based consultancy TeleChoice Inc., said McGinn had lost credibility both in forecasting earnings and in making the kind of changes that Lucent needs to stay competitive. For example, Hettick said, Lucent executives "already publicly admitted missing the market window for optical networking products."

"If Lucent is to compete with the Ciscos and Nortels of the world, they're going to have to act like a next-generation company," Hettick added. That translates into responding to user needs at the same speed as the telecommunications and network outsourcing companies that are among the buyers of its equipment, he said.

Lucent needs to find a CEO who can establish a long-term strategic direction for the company and then make sure that sticks, said David Toung, a financial analyst at Argus Research Corp. in New York. Currently, Toung said, Lucent's business outlook "changes every quarter."

As expected, Lucent said earnings from continuing operations during the fiscal fourth quarter that ended Sept. 30 dropped from $768 million in the same period last year to $600 million. The financial results originally were due to be reported tomorrow, but the company accelerated the release in the wake of today's management change.

In a statement, Schacht said Lucent executives were "clearly disappointed" by the company's showing in the just-ended fiscal year. Fiscal 2001 is shaping up to be "a transition and rebuilding year for Lucent," he added.

Earlier today, as part of the announcement that McGinn had been fired, Lucent said it only expects to break even during the current first quarter, with revenue from continuing operations forecast to decline about 7% year-to-year. The company said that doesn't take into account the effect on earnings of a planned business restructuring charge, but it added that operating results should improve each quarter on a sequential basis during the rest of the new fiscal year.

Murray Hill, N.J.-based Lucent suspended a previously announced search for a chief operating officer because of today's management change (see story). Schacht, 66, was CEO of Lucent from 1995 to 1997 and then continued as its chairman into early 1998. In March, he was named chairman of Avaya Inc., a spin-off of Lucent's enterprise networking equipment business. Lucent said he's now giving up that position, although he will remain a member of Avaya's board.

Related stories:

  • Lucent networking spin-off targets service providers, Sept. 29, 2000
  • Once strong, Lucent now trails rivals, Aug. 14, 2000
  • Shake-up at the top of Lucent's optical-networking unit announced, Aug. 4, 2000
  • Copyright © 2000 IDG Communications, Inc.

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