The Wall Street Journal published a critical review of Alcatel's acquisition of Lucent last Thursday. As I read the piece, I looked at my own prior posts on this bad idea last Spring, here, and here.
Sadly, it appears that another of my dismal predictions has come true. The acquisition has failed to produce a firm that can create superior shareholder returns. And the CEO, Pat Russo, who led Lucent into this situation, is foundering, as expected.
Russo is reputed to be just steps away from the axe. The 'merger', as it was billed, but was, in reality, an acquisition of Lucent by the French telecom company, Alcatel, has failed. Falling margins, from sales bought at too low a price, are now crippling the sales the firm has managed to win.
The Journal's Thursday article lays out in detail how things have gone from bad to worse for the combined telecommunications giant. How one major competitor, Sweden's Ericsson, took advantage of the period of transition and turmoil at Alcatel to press customers and win accounts from the newly-combining firm.
The Alcatel situation highlights a fundamental reality of the marketplace. Two mediocre firms with struggling product lines cannot, by combination, magically fix their problems and become an excellent firm. Instead, they become one, larger, usually confused mediocre firm.
Sector excess capacity usually results, over the long term, in the better players taking share, while the losing players consolidate and shrink. Alcatel has done the first part of that already, and Russo seems to be presiding over the second step.
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