CASE STUDY Chapter 5 Cross-cultural Negotiation and Decision Making

The Alcatel-Lucent MergerWhat went wrong?

It did not take long after the merger for things to start going wrong for Alcatel-Lucent CEO
Patricia Russo, who opted to leave the vendor last month after admitting she could no longer
work with fellow board resignee chairman Serge Tchuruk.
MICROSCOPE, August 1117, 2008.1

It seems that this deal was not meant to happen. The original merger negotiations
between Alcatel of France, the communications equipment maker based in Paris, and Lucent
Technologies, the U.S. telecommunications giant, took place in 2001. However, the finely
detailed deal collapsed on May 29, 2001, after the two companies could not agree on how much
control the French company would have. Lucents executives apparently wanted the deal as a
merger of equals, rather than a takeover by Alcatel.2

The failed deal was regarded as a severe blow to Lucents image. Industry watchers questioned how Lucent would be able to survive this most recent blow. Although it was not clear
which company initiated the negotiations, it was reported that Lucent ended them after much of
the senior management detected that the proposed deal would not be a merger of equals.3

In 2006, however, renewed negotiations took place, resulting in the transatlantic

relationship being consummated. Shareholders in France approved the merger of the
telecommunications equip- ment makers Alcatel and Lucent on September 7, 2006. However,

Alcatel investors still had concerns about the leadership and financial health of their new
American partner. Alcatels chief executive, Serge Tchuruk, tried to reassure the 1,500
shareholders gathered in Paris to back the merger, saying the companyto be called AlcatelLucentis truly global and has no equivalent today and wont in the future.4 Mr. Tchuruk had
agreed in April 2006 to pay 10.6 billion euro ($13.5 billion then) for Lucent, in a deal to create
the worlds biggest telephone equipment maker, although industry watchers considered the bid as
financially inadequate for Alcatel investors. The stock swap was valued at one Alcatel American
depository share for every five Lucent shares. Tchuruk said the combined company would realize
1.4 billion euro ($1.8 billion) in cost savings over the following three years, in part by cutting
9,000 jobs, about 10 percent of the combined workforce.5 He noted that Alcatel-Lucents
revenue would be spread almost equally across Europe, the United States and Asia, offering
greater long-term stability. Alcatel does most of its business in Europe, while Lucent does the
majority of its business in the United States. Lucent Shareholders also endorsed the deal.

We are another step closer to creating the first truly global communications solutions
provider with the broadest wireless, wireline and services portfolio in the industry, said the chief
executive of Lucent, Patricia F. Russo, who was to retain that role in the combined company.

At that time, the company had combined sales of $25 billion.6 Amid concerns about the
potential for cross-cultural conflicts, Tchuruk said that, while cultural issues could arise,
everything is under way to make sure this human factor is dealt with, he said, adding that
Alcatel already oper- ated as an international company with a wide mix of nationalities; English
is the official language of the company.7 Other industry commentators cast Alcatel-Lucent as a

Franco-American telecoms behemoth that many regard as a giant transatlantic experiment in

multinational diversity.8

After the shareholders of both companies endorsed the deal, regulatory hurdles were
cleared in both the EU and the U.S.9

An Alcatel-Lucent merger provided the combined company a strong position in several

categories

of

equipment

sold

to

the

major

telecommunications

carrier:

wireless

telecommunications equipment, wireline equipment, wireless infrastructure, Internet routers,

equipment for carrying calls over the Internet, etc.10

However, success was illusive. Overall, it seemed that the difficulties of integrating a
French company with an American one dominated during Russos tenure, with analysts suggesting the corporate culture of Lucent clashed with Alcatels French business model. One source
close to the company saw little evidence of cooperation between the two factions from the outside.11 In July 2008, the Alcatel-Lucent CEO Patricia Russo resigned, citing the inability to get
along with Serge Tchuruk, her fellow board member; subsequently he too resigned. Much of the
resentment came from Alcatel management because the overall leadership had been handed to
the target company, Lucent, an unusual decision; in addition, it became clear that it was a poor
decision to appoint leaders based on their nationality rather than skills. Other factors seemed to
be against Ms. Russo, however, as she struggled to bring together the vastly different cultures of
the two companies amid a tough business climate. As the first woman to run a company listed on

the CAC 40, she had to make her way in the clubby, male-dominated world where French business and politics overlap.12

In addition, the combined, but still rather weak companies, faced low-cost competition
from new Chinese rivals and were struggling in a business that Internet technology was changing
beyond recognition. Worse, demand has been weakening across the industry. A Barrons article in
August 2008 noted that while it might have been helpful if outgoing CEO Patricia Russo had
spoken French, thats not why she and Chairman Serge Tchuruk failed to make a go of the 2006
merger of Alcatel and Lucent Technologies. They were pushed into each others arms out of
desperation as the industry began a painful, necessary consolidation. . . . the telephoneequipment business is brutal and likely to see more attrition. The marriage didnt avert six
straight quarterly losses.13

The series of quarterly losses ($7 billion loss since the merger) led to a bombardment of
negative comment as Alcatel-Lucent initiated restructuring and cut around 16,500 jobs.14

In September the new chiefs were announceda French chairman, who lives in America,
and a Dutch chief executive, who will be based in Paris. Both Philippe Camus and Ben
Verwaayen were considered to have the personality and experience that could iron out the beleaguered telecoms groups problems. Mr. Verwaayen accepted the new job only when he found he
could get along with Mr. Camus, who had already agreed to be chairman. We share the same
sense of humour, he says. You need to have complete understanding at the top of the house.15
We must deliver on the merger, Ben Verwaayen, the former head of BT, who was appointed to

succeed Patricia F. Russo as chief executive, said at a meeting with journalists. Acknowledging
that there remained a divided Alcatel-Lucent, Mr. Verwaayen said, We need to move quickly
to become an integrated company.16 Mr. Verwaayen speaks fluent French and English. AlcatelLucent operates in 130 countries, and like many global enterprises, its language of business is
English. He was quoted in The Economist as saying that he sees his job as removing barriers
within the company and unleashing its talents. But perhaps his biggest advantage in rescuing a
failed Franco-American merger is that he is neither French nor American.17

Case Questions
1. Referring to the case and this chapter, discuss what conditions and negotiation factors pushed
forth the merger in 2006 that were not present in 2001.
2. Research the status of the merged company at the time of your reading of this case. What has
happened in the industry since the merger, and how is the company faring?
3. Evaluate the comment that the merger is a giant transatlantic experiment in multicultural
diversity. What evidence is there that the company has run into cross-cultural problems since
the merger took place in 2006?
4. How much of the decline do you attribute to leadership problems, as opposed to industry
factors?
5. What, if any, factors should have been negotiated differently?

1. What conditions and negotiation factors pushed forth the merger in 2006 that were not
present in 2001?

In 2001, the merger negotiation is failed due to disagreement between the Alcatel and Lucent on
how much control the French company would have. Lucent wanted the deal as a merger of
equals, rather than a takeover by Alcatel. In 2006, however, renewed negotiations took
place, resulting in the transatlantic relationship being consummated. Shareholders in France
approved the $10.7

billion

merger

of

the

telecommunications

equipment

makers

Alcatel and Lucent on September 7, 2006.

2. Research the status of the merged company at the time of your reading of this case. What
has happened in the industry since the merger, and how is the company faring?
Since the merger of these 2 companies, they are able to create the worlds biggest telephone
equipment maker. The combined company would realize 1.4 billion euros ($1.8 billion) in cost
savings over the next three years, in part by cutting 9,000 jobs, about 10 percent of the combined
workforce. Besides, Alcatel-Lucents revenue would be spread almost equally across Europe, the
United States and Asia, offering greater long-term stability.
The industrial review of the global telecommunications equipment sector shows a severe
competition from telecom giants such as Fujitsu, Huawei Technologies, Cisco Systems, Motorola
and Juniper Networks amidst others. (www.datamonitor.com)
The severe competition from these numerous telecom providers has made Alcatel- Lucent's
revenue take a low turn. The company has been recording losses due to price wars and economic
Meltdown, offering discounts to retain customers has also resulted in more losses. From the
2006 merger, the $27.5 billion Corporation has posted six (6) quarterly losses and has taken
more than $4.5 billion in write-down's, at the same time its stock has reduced by 50% (Business
Week, 2008, issue 4090).

Furthermore, tight credits in the face of economic downturn have necessitated a reduction in
investments. Alcated-lucent is in deep waters, but with perseverance and overcoming its cultural
differences, it would boom again.
After a critical evaluation of events preceding the merger in 2006, the company (Alcatel- Lucent)
has not been as profitable as speculated by the proponents of the merger. Its financial status has
not been encouraging with revenue which fluctuates from 12, 282 in 2006, 17, 792 in 2007 to
15, 996 in 2010 (Alcatel-Lucent Annual Report 2010). This can sure be attributed to internal
problems the company has taken steps to tackle by making sure the goals and objectives are
achieved by complying with laws and regulations and improving operations

3. Evaluate the comment that the merger is a giant transatlantic experiment in

multicultural diversity. What evidence

is there that the company has run into

cross-cultural problems since the merger took place in 2006?

The comment that the merger is "a giant transatlantic experiment in multicultural diversity" is
true because of the merger involves two different companies from two out of three Triad of the
world (United States, European Union and the Asian Pacific). The Franco-American marriage,
with two different ways of doing business (Business Culture) and diffeerent languages (AlcatelFrench and Lucent-English) and a board that has its own style of reporting and involvement in
politics also been an issue in France. It has been described as a transatlantic experiment because
such a huge merger across the Atlantic has not been carried out in the past and critics only hoped
for its failure.
Basically, it is evidenced by the event of things to say that the cross-cultural problems have been
clearly visible. Shareholder displeasure has been voiced out heating the polity and putting the

board under pressure. This has necessitated the resignation of CEO Patricia Russo and Chairman
Serge Tchuruk.
Gomes, et al. (2011) asserted that there exist consequences of managing interactions on
performance and output in multicultural organisations. Furthermore he postulated that cultures
and attitude to work may be different from one country to another. The crosscultural problems
have had a negative impact on Alcatel-Lucent's profitability, as the merger would have been
more profitable if the cultural issues have been resolved. Declining financial performance is an
evidence of its internal cross-cultural problems. Also, the French business model where women
are relegated to the background contrasted with the American business flexibility where the
entrepreneurial initiative rules. The former CEO in person of Patricia Russo found managing the
company such a huge task, amidst political influence in France and difference in the corporate
culture of
America and France business models. Competitors have moved forward. Hauwei, a Chinese
company has improved its own competitiveness while Alcatel-Lucent struggles to make a head
way with its numerous cross-cultural problems, with Hauwei poaching its customers and fighting
for market share.
Furthermore, the cross cultural problems were also noticeable in marketing and financial
reporting styles. Lucent was a little more flexible in its activities while Alcatel has been
traditionally known for its rigidity. It must also be stated that the American business model which
supports a single financial reporting also clashed with France's business model of liberal annual
reporting
4. How much decline do you attribute to the leadership problem as
apposed to the industry factors?

Lack of visionary leadership is one of the most evident factors that created problems for the
company

in

the

case

discussed.

would

suggest

that leadership is the soul of the

company and everything else comes into place if the leadership is strong. So I would place
immense significance to leadership in this case. Appointments of CEOs have massive influences
on stock prices - up and down. Corporate performance is often described as a product of one
individual's leadership. A succession plan - or failure to implement one - is regarded as a
bellwether of subsequent corporate performance. The success of organizations like Coca-Cola,
General Electric and IBM is not considered a product of the thousands of people they employ,
but of the individual leadership qualities of Goizueta, Welch and Gerstner. And yet leadership in
a vacuum isn't leadership at all. What impact can any CEO have, speaking to an empty room? It
is the people that work for an organization, and their willingness to accept, embrace and further
a leader's

vision, that ultimately determine results. Yet the most common measure of an

organization is seldom the quality of its staff, and all too often the quality of its leaders

5. What if any factors should have been negotiated differently?

The merger negotiations could have been carried out in the following way

1. Facilitator
When meetings occur between the cooperatives trying toreach agreement on a plan
combination, a facilitator helps improve communications and the process of

for

developing

altemative solutions to many of the problems that arise. Some problems may seem to be
solvable without a facilitator, such as making decisions on various business operating changes
for a combined organization. However, the participating organizations usually have different

preferences and priorities. Customarily, each participating organization has an equal number of
representatives on a joint merger committee. Frequently, two cooperatives are involved in
negotiating a combination, which sets the stage for group decisions to become deadlocked. A
facilitator initiates team-building discussions aimed at finding alternative ways around these
deadlocks.

2. Develop producer-to-producer contract

Experience shows that durable progress in consolidation or merger talks requires directors to be
the leaders in the discussion and planning sessions. A joint merger committee should formally
consist of directors. Managers serve as advisors and provide information as experts in operations
and the industry. Committee members will usually seek the opinions and judgement of managers
of their cooperatives on important decisions. But, the board should not permit managers to
exercise excessive influence over the progress and direction of talks.

3. Follow a strategic plan

Before a merger committee convenes, it should develop a strategic plan that sets out major
objectives. For example, increased economic efficiency of the cooperative is usually a major
objective of mergers and consolidations. As negotiating progresses, the committee will face
numerous difficult decisions and tradeoffs. A strategic plan provides criteria for making hard
decisions. Efficiency-related objectives specified in a strategic plan help the committee give
adequate weight to choices that will increase the economic pie and prevent contentious pie
sharing issues from derailing the process. The distinct roles of directors and management are
particularly clear in strategic planning. Directors are responsible for developing a strategic plan

and defining the vision for a neworganization. The joint merger committee is charged with
developing a consensus plan. Managements role is to advise on feasibility and to carry out the
agreement

4. Use the word WE

Directors must focus on using the word we during discussions. They must avoid employing
protective card playing traits and getting caught up in a game of who is coming to the table
9with the most to offer. Usually, each cooperative brings value to a potential combination. It is
important to avoid arguing about who is offering or contributing the most. While cooperative
directors must protect the assets and operations with which they are entrusted by members, they
must also keep an open mind while creating a new, unified cooperative