More Job Cuts Loom at Lucent

Lucent ( LU) is pulling out the ax once again, and CEO Patricia Russo is doing the swinging.

The struggling telecom networking gearmaker is planning yet another massive scaledown as it attempts to right itself in a collapsing market, people close to the company say. These people say that Lucent veteran Russo drove the decision to make more job and business-line cuts, signaling her willingness to go further than Chairman Henry Schacht.

The latest round of cutbacks looms as companies across the struggling network-gear sector face the choice of shrinking their already sinking businesses even more or placing high-stakes bets on a long-anticipated industrywide recovery. With the shares of Lucent and many of its peers down 90% and more over the last year alone, neither course appears certain to succeed as the telecommunications economy continues to crumble.


Lucent is preparing to drop product lines and cut its total staff by an additional 25% below targeted levels, eventually bringing total staff to between 30,000 and 35,000 workers, according to people familiar with the company. The cuts would leave Lucent at a quarter of its size when it was spun out from AT&T ( T) some six years ago.

The latest plans continue an effort the company started a year ago, when it vowed to focus on its best biggest buyers and cut all unprofitable customers, countries, products and research centers.

A number of prized projects and divisions are expected to feel the pinch, including parts of its fabled Bell Labs, some of its highly engineered optical efforts including its LambdaRouter switch and certain areas of data communications and network access lines. Many of these areas were previously thought to hold the keys to Lucent's future growth.

Sacred Cows

The latest reduction will sacrifice a sizable portion of the company's top-line performance, say people familiar with the plans. With the loss of several unpopular and unprofitable products, Lucent's total sales will likely drop to a range between $9 billion and $11 billion annually, or $2.5 billion per quarter, these people say.

As goes revenue, so goes the staff
*Revenue figures are quarterly
**Sept. '01 and Dec.' 01 numbers are estimates.
****3rd and 4th quarter figures are analysts estimates

While there are plans to bring costs down to reach an earnings break-even point somewhere below quarterly revenue of $3.5 billion, Lucent spokeswoman Michelle Davidson said Lucent has "no frame of reference that gets us" to 35,000 or below.

"We will continue to monitor the market and size appropriately," she added.

Analysts say steep cuts are necessary given the continued freefall of demand for network gear from phone companies pinching pennies in a battle for survival.

"I think they found the June quarter so surprisingly bad that they decided there would be no more sacred cows and that anything could get cut," says Lehman Brothers analyst Steve Levy, a Lucent bull.

Banks Are Open

One problem is that massive cuts may present a potential violation of Lucent's loan covenants. If Lucent takes a hefty restructuring charge for things like employee severances, equipment and facility writedowns and supply contract settlements, it may run afoul of certain net value guidelines assigned by the bankers, analysts say.

Lucent says it's aware of the rules.

"When developing our restructuring plans, we always take into consideration the covenants related to our credit facility," a Lucent spokesman wrote in an email. "While we wouldn't speculate on the size of our upcoming charge, at this time we don't expect it to exceed the amount allowed for these type of charges under the covenants."

Analysts say it's likely Lucent will work with its bankers on the restructuring plan as it seeks to renew a $1.5 billion credit line, which expires in February. But as observers point out, in many situations in which a customer has to renegotiate, the banks will agree to terms only after shrinking the commitment, raising the rates, or both. That means more pain for Lucent.

Lucent has already said it will cut well beyond the initial 7,000 jobs it announced earlier this year. And the company has previously said it expects to have a total staff count of 45,000 by year-end.


But insiders say CEO Russo is pushing the cuts far beyond levels Chairman Schacht has previously been willing to go. Schacht, after all, has been the guardian of Lucent's legacy. He was the original CEO when the equipment arm was spun from AT&T in 1996. He returned to that position when his successor Rich McGinn was ousted. He later handpicked Russo to take the helm.

Still, Schacht has made some unpopular moves as he's tried to keep an active hand on the tiller. It was Schacht, investors will recall, who ditched a proposed merger with France's Alcatel ( ALA) at the last minute. And Lucent's rank-and-file have grumbled over Schacht's decision last year to give several of his top management pals handsome retention bonuses while the company announced a succession of layoffs.

Morale at Lucent has been low for many months, say people both inside and outside the company. Some say the constant uncertainty about job cuts has been a big contributor. Analysts and insiders say management is divided into two camps. Schacht's side stubbornly believes that Lucent will soon return to its previous glory and that cutting people and resources will only hamper that process.

The Russo camp is said to be sympathetic to that belief, but given the realities of the market, sees cuts as the only option.

"Lucent is in a tough position," says former Lucent investor relations manager Tom Lauria, who is now an independent financial advisor with Avtera Management. "They expected the market to have improved by now and it hasn't."

"They have two choices," adds Lauria. "Don't cut and sustain losses in the hopes the industry eventually turns around. Or, make the swift, necessary cuts to return to profit. It would be best for everyone, especially the employees, if they got there quickly."

Indeed, it's stiff medicine for a distressed company in a very sick industry, say analysts.

Or, as Lehman's Levy asks, "Do you want a $12 billion-a-year company that's losing money or a $9 billion company that's making money?"

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