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WSJE: Prabhu's Departure Creates Doubt at Troubled Alcatel

ALCATEL press release
New York Times article - At Alcatel, Profit, Job Cuts and an Executive Resignation

July 27, 2001

Dow Jones Newswires

WSJE: Prabhu's Departure Creates Doubt At Troubled Alcatel

By KEVIN J. DELANEY

Staff Reporter

PARIS -- Alcatel SA's chief executive, Serge Tchuruk, is frugal with his compliments. So it meant something when he called his chief operating officer, Krish Prabhu, "the sort of symbol of what I would like the new Alcatel to be." The Indian-born American is tech-savvy, multicultural and widely praised in financial circles for his straight talk.

But that symbol of hope faded Thursday, as Alcatel announced a 3.12 billion euro net loss for its latest quarter and said Mr. Prabhu had decided to resign.

Alcatel played down the departure, saying that Mr. Prabhu had been appointed to the company's board and would continue to advise Mr. Tchuruk. But the 46-year-old Mr. Prabhu had been seen as a possible successor to Mr. Tchuruk, and the news raised questions that resonate loudly at a moment when Alcatel is struggling to streamline its operations and hoping to reassure shell-shocked technology investors.

On Thursday, Alcatel predicted that the sector wouldn't turn the corner before next year. The company said it would trim its permanent staff by at least 16,000 workers in 2001; it had already confirmed last month that it would shed 50 or more of its 100 factories. The last thing the company needed was any questions about its leadership.

"It is a bit of a psychological blow," said Douglas Smith, a telecommunications-equipment analyst at Credit Suisse First Boston in London.

In 2003, the company's board will vote on whether to keep Mr. Tchuruk, now 63, at the helm. Alcatel's chief financial officer, Jean-Pierre Halbron, isn't considered a candidate for the top job because he will turn 65 in August; company officials have begun talking about his retirement. Alcatel does have some backups on its executive bench, including Christian Reinaudo, the president of its optics unit, and Olivier Houssin, the head of its beleaguered "E-business" group, who are both in their 40s.

But Mr. Prabhu, as the third member of Alcatel's executive committee, was by far the most visible candidate for the top job. So the real question now is whether any of Mr. Tchuruk's potential successors have what it takes to steer the mammoth company back to profitability and win over investors and customers.

If anyone was up to the job, it was Mr. Prabhu. When he was appointed chief operating officer two years ago, one analyst dubbed him "the man with the golden touch." He's so respected that the industry is awash with rumors about how Mr. Prabhu almost bolted to other top jobs in the sector, including the CEO posts at Lucent and Canada's Nortel Networks. Even more telling is how his name came into play in last spring's aborted merger talks between Alcatel and Lucent Telecommunications Inc. Although the two companies couldn't agree to a deal, they did concur that Mr. Prabhu should run their combined operations in the U.S., according to people familiar with the discussions.

Among the things analysts like about Mr. Prabhu is his tough talk on profits. He has publicly supported investors who say Alcatel's telecom-equipment business should achieve double-digit operating margins. (The margin was 2% in the second quarter.) Backing up his words, he helped convince Alcatel to sell off factories in Texas, North Carolina and Puerto Rico early last year and focus its remaining North American plants on new product introductions.

Mr. Prabhu also gets credit for helping shift Alcatel's culture closer to that of Cisco Systems Inc. and other American networking leaders. "He's been able to come from the U.S. and question some of the practices that happened at Alcatel in Europe," says Susan Anthony, an analyst at Credit Lyonnais in London.

Then there's the internationalism he represents. A native of Bombay, Mr. Prabhu lives in Dallas, reads the New Yorker magazine and is obsessed with baseball's World Series. What's more, he doesn't speak French. That stands out at a company rivals sometimes jokingly have written off as a Belgian-run maker of antiquated phone switches.

Mr. Prabhu's honesty helps too. "Alcatel in the past did not have a very competitive offering, let's face it," he said during a 1999 interview.

Mr. Prabhu's official reason for resigning was to spend more time with his family in Texas. But speaking on a conference call with analysts Thursday, Mr. Prabhu also said that he had found it increasingly hard to help run the French company from the U.S. "I am not meeting my own standards for executing my role as COO," he said.

An electrical engineer by training, Mr. Prabhu helped propel a multibillion-dollar buying spree in which Alcatel snatched up a handful of U.S. networking startups to help fill out its enterprise data offerings and compete with the likes of Cisco. Along the way, Alcatel also picked up some bigger fish, including DSC Communications Corp. of Texas in 1998 and Canada's Newbridge Networks Corp. last year. The company's U.S. activities accounted for 22% of its total sales in 2000, compared with less than 10% just two years earlier.

At the same time, Mr. Prabhu made progress in helping streamline the activities of Alcatel, which until the mid-1990s was active in businesses as different as winemaking and cruise-ship construction. And he did all this, he says, without putting in a lot of overtime.

"I'm amazed at people who brag about how much they work," Mr. Prabhu has said in the past, claiming that his typical work week was 45 or 50 hours long. "If I'm spending more than that I'm doing something wrong."

Those kind of hours may no longer be enough. The latest industry downturn has caught the company -- and all of its rivals -- flatfooted and accelerated its need to trim expenses and target future pockets of growth in the sector.

Alcatel's immediate challenge is to manage its transformation from a company that makes many different things to one that focuses primarily on telecom carrier customers and outsources most of its production. That's a tall order in Europe, where resistance to the labor-related moves required is considerable. The other big challenge is to position Alcatel in the growth areas of the market. Historically, the company has been slow to turn its research into successful products -- though there are signs that has changed. For one thing, it is the market leader in digital subscriber line technology, which lets users connect to the Internet at high-speeds over normal copper phone lines.

Analysts caution that it's probably wrong to overstate any one executive's responsibility for the future success of a huge telecom-equipment maker. In fact, Mr. Prabhu's resignation was overshadowed by Alcatel's second-quarter earnings Thursday, which investors liked for their lack of any negative surprises. Shares rose 4.7% in Paris trading to close at 17.70 euros. And an Alcatel spokesman said the company was mulling whether the position of chief operating office was even necessary any more.

But analysts also praise Mr. Prabhu's performance in precisely the areas that the company needs the most help now: identifying industry and technology trends, keeping an eye on the bottom line, and nurturing relationships with the biggest customers. "He has a lot of credibility in terms of market understanding and technology background," says CSFB's Mr. Smith.

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