Loss-making Alcatel-Lucent dumps CEO and chairman

PARIS (Reuters) - Alcatel-Lucent ousted its chairman and chief executive on Tuesday and cut its sales growth expectations yet again, which investors took as a sign the French-American group was continuing to lose market share.

The world's number one provider of fixed-line telecoms networks has seen its market value melt more than 60 percent since it started operating as a combined business in December 2006 following Alcatel's purchase of Lucent of the U.S.

Chief Executive Patricia Russo, who took the reins after the tie-up, will leave by year-end with a pay-off of up to 6 million euros ($9.45 million), while 70-year-old chairman Serge Tchuruk, architect of the merger, will leave on October 1.

"Serge and I think the company could benefit from new leadership ... I am committed to ensuring a smooth transition," Russo said in a conference call with analysts.

One person who has frequent contact with Tchuruk suggested he helped the board take the decision to replace Russo and fell on his sword in the process.

Over the past two years, the French press has reported the pair's recurring skirmishes, which Alcatel-Lucent consistently denied. Again on Tuesday, a spokeswoman denied Tchuruk orchestrated Russo's ouster.

"This was a decision that Serge and Pat made together and to speculate otherwise is totally inaccurate," she said.

The complexity of the controversial deal combined with a clash of corporate cultures and dire market conditions were partly to blame for the group's woes, analysts said.

The group took too long to select its combined technology portfolio, spooking customers amid fierce competition, while management, which lost key people after the merger, struggled to remain focused, they said.

"We have felt that weak management is mostly to blame for these shortcomings, and we hope that new management can bring the company back to greatness," said Nomura analyst Richard Windsor in London.

Alcatel-Lucent shares, which rose on Tuesday as much as 6 percent, closed up 2 percent at 3.91 euros, valuing the group at 8.9 billion euros. The stock has fallen 63 percent since January 2007.

"The problem with Alcatel-Lucent is its diversified business model, which forces it to look after a lot of products," said Vincent Rech, analyst at SG Securities.

LONG GOODBYE

Investors have been pushing hard for many months to get rid of Russo and Tchuruk. In May shareholders publicly criticized the pair and approved measures that made it easier to dump them.

Alcatel-Lucent cut its forecast for third-quarter sales, saying it now expected them to remain flat or decline against the previous three months to June, while investors were looking for growth of about 2.5 percent.

"They are massively understating the market share they have lost," Nomura's Windsor said. "We think that the company is losing share to Nortel and to the Chinese."

Nokia Siemens, Ericsson and Alcatel-Lucent are the leading players in the telecoms network market, but have been increasingly challenged by Chinese vendors Huawei and ZTE.

With aggressive pricing, Huawei took the number four spot in the global telecom network equipment market at the start of the year, overtaking Nortel Networks and Motorola.

Alcatel-Lucent also reported underlying April-June sales and profits slightly ahead of expectations, but made a big net loss for the quarter due to writedowns. The group said it expected 2008 revenues to fall "in the low to mid single-digit range".

"This leaves an awful lot of revenues to come in Q4 to meet the full-year guidance, raising the specter of yet another warning in Q4 2008," Nomura's Windsor said.

CULTURE SHOCK

Russo, described by her associates as down-to-earth and a tough negotiator, jetted into her job in Paris filled with American corporate conviction that flew in the face of French culture.

The former chief executive of Lucent had promised shareholders she would learn to speak French, but she did not have time to master the language.

Tchuruk was a former arms engineer who climbed the corporate ladder to become head of oil group Total before joining Alcatel in 1996.

A tireless strategist, he engineered a restructuring of the sprawling Alcatel empire into the core telecoms activities, a defense branch that became part of Thales and the Alstom industrial engineering group.

His departure is likely to reopen speculation over the future of Alcatel's large stake in Thales, which Tchuruk had, according to sources close to the matter, wanted to keep. Thales shares fell 3.2 percent.

The merger with Lucent was meant to crown his career as it pulled the equipment firm back to the front line of global competition with Nortel, Nokia Siemens Networks and Ericsson.

Lucent's aggressive use of vendor financing -- lending money to customers to buy its gear -- combined with product mis-steps and overly ambitious growth forecasts, proved a disaster when the Internet bubble burst.

Alcatel-Lucent said both Tchuruk and Russo had themselves decided to quit and the board would look for a new non-executive chairman and CEO immediately.

"It is now time that the company acquires a personality of its own, independent from its two predecessors," Tchuruk said in statement.

(Additional reporting by Tarmo Virki in Helsinki, Tiffany Wu in New York, Jessica Mead, Julien Toyer, Sudip Kar-Gupta in Paris; Editing by Paul Bolding)