Lucent, Nortel Flounder as Searches for New Skippers Press On

Rescue heroes wanted, supernatural powers a must, thick skin essential.

It's no coincidence that Lucent (LU Quote) and Nortel (NT Quote) are both grappling with CEO searches after the past year's missteps and red ink, observers say. Like many companies in the telecommunications industry, both firms must quickly address shifting product strategies, a roster of faltering customers, balky organizational structures and looming liquidity problems. Both have seen their shares fall more than 75% since last summer.

What isn't clear, however, is whether the networking-equipment rivals will succeed in attracting top management talent, analysts and investors say, considering the seriousness of these challenges and the opportunities at smaller, more manageable companies. A delay or failure to attract a top CEO to either company could keep the stocks trading at their depressed levels, punishing shareholders and ultimately threatening the turnaround both companies are banking on.

Hopes and Dreams

"I don't believe new and effective leadership is critical to effect a turnaround," says Lehman Brothers analyst Steve Levy, who rates Lucent a hold and whose firm has no underwriting ties to Lucent or Nortel. "But it is absolutely necessary if either company hopes to attain the market leadership positions they once held."

And it's not clear that investors are eager to buy the turnaround stories as scripted by the leadership that got the companies into this mess. These are, after all, the managers who embarked on radical production expansions on the eve of a crippling slowdown and pushed new initiatives to lend highly risky companies billions in cash. Wall Street tends to require fresh ideas from new blood before it enthusiastically agrees to underwrite major revival projects.

Henry Schacht was supposed to stabilize the wildly rocking Lucent. The former Cummins Engine chief and Lucent director was yanked out of retirement to serve as Lucent's interim CEO after Rich McGinn was sent packing in October. But an eight-month CEO search has netted no takers, and any plausible inside picks have since left or were fired, observers say.

"If they had any qualified internal candidates they would have named them by now," says Don Peterson, a former Lucent CFO who left to lead Avaya (AV Quote), Lucent's office communications gear spinoff.

Heads Will Roll... Lucent, Nortel over one year

Archrival Nortel enlisted a headhunting firm last month to find CEO John Roth's successor. Nortel's chain of ascent was broken earlier this year when COO Clarence Chandran was forced to quit for medical reasons. On the day of Chandran's resignation, Roth said he, too, would retire next year. Nortel's would-be COO, Frank Plastina, was thought by some analysts to be the leading candidate for the top job, but Nortel's launch of an external search suggests otherwise.

Meanwhile, the third big networking company, Cisco (CSCO Quote), is just a heartbeat away from its own ascension problem. Two top Cisco executives, Don Listwin and Gary Daichendt, defected in recent months, depleting the brain trust and leaving no heir apparent to CEO John Chambers.

Plate Spinning

Both Lucent and, to a lesser degree, Nortel face a cluster of problems any qualified CEO candidate would reasonably choose to avoid. Not the least of these problems is a century's worth of business habits that are increasingly out of step with today's presumably leaner, more nimble organizational structures.

The job requirements are daunting, like trying to spin four plates simultaneously in the air: reinvent a company; sidestep a steep spending slowdown; winnow the right divisions, products and staff; pay creditors and reassure anxious investors.

Not all companies can swing it. History is rife with tales of dominant brands that have since vanished, says Francis McInerney, a founding partner of North River Ventures, a New York tech-consulting firm. "In its day, for example, Singer was a powerful company that had a tremendous hold on a market," says McInerney, who consults to many networking and telecom service companies. "Today, it basically doesn't exist.

"Once companies start heading for the precipice, it takes enormous force to prevent them from going into that black hole," says McInerney. "It's a difficult transition and few companies can do it; I think IBM might be the best and most graphic of the gut-wrenching, ripping-up-of-management-structure examples," says McInerney, referring to the overhaul Lou Gerstner is credited for since he arrived at Big Blue in 1993.

"Gerstner had to change nearly everything about IBM until the company was no longer recognizable," says McInerney, author of FutureWealth, a trend-spotting book on the info-tech industry published last year. "But it was done and it was ugly."

Little Blue

So where are the future Gerstners? Probably off exploring the greener grasses amid the tech start-ups, say observers.

"There are some very qualified people out there," says a Southern California-based hedge fund manager who asked not to be named. "But in this tough environment, who wants to be in [the] spotlight, sitting in the hot seat, trying to heal the very sick or, for that matter, raising the dead?"

Bob Metcalfe, one of the fathers of the modern networking industry, inventor of Ethernet and founder of 3Com, agrees. Given the current woes, the best jobs for leadership opportunities probably aren't with Nortel and Lucent at this point, says Metcalfe.

"Life is too short to walk into the messes these companies are in right now," says Metcalfe, who now works with Polaris Ventures, a tech venture-capital firm. "It's best to wait until telecom spending starts ramping again."

But by the time the happy days come around again, Nortel and Lucent may find the road to success involves more than untangling themselves from their current mess.

Arguably, central to Gerstner's success at IBM was his ability to remake the company as more of a service provider and less of a perpetually hit-or-miss hardware vendor. Though Lucent and Nortel executives espouse a Gerstner-like philosophy, their market is entirely different. Unlike IBM's campaign to solve one company's IT problem at a time, Lucent and Nortel face a global rat's nest of incompatible networking interests and tech protocols.

So perhaps the only thing more threatening to Nortel and Lucent than staying on their questionable paths to recovery is appointing a leader to take them down the wrong path.

"There's a great opportunity at Lucent or Nortel for someone to take it over and run it into the ground," says North River's McInerney. "You could have an executive come in thinking they were doing all the right things and end up totally ruining things."