Alcatel-Lucent Stock Swoons On Financial Report

The dream merger of Alcatel-Lucent experienced its first nightmare Tuesday as the firm shocked investors with a preliminary warning of its fourth quarter financials.

While chief executive Patricia Russo said costs associated with the massive merger and "a shift in spending" by some of its North American customers was taking a toll on the company's business, she predicted Alcatel-Lucent would resume its growth in the next fiscal year.

The potential slump in operating profit sent the firm's stock down 11% in early trading.

Reaction by analysts was swift and critical. "Such a derailment only months after completing the controversial merger should reinstill fears that the combination of Alcatel and Lucent is exceedingly ill suited to deliver," said Dresdner Kleinwort analyst Per Lindberg in a note to investors. "Massive market share losses are in clear evidence."

Alcatel-Lucent said it expects its full year 2006 revenue to be about 12.3 billion euros ($15.9 billion) with operating income of about 0.71 billion euros. Revenue for the fourth quarter is expected to be 3.87 billion euros, with operating income expected to be 0.12 billion euros. The company said it will report final financial reports Feb. 9.

Russo stressed the brighter side of the merger in which Alcatel emerged as the dominant partner. "We completed the first and largest merger to date in our industry," she said in a statement, "We enhanced our wireless portfolio through the acquisition of Nortel's UMTS (Universal Mobile Telecommunications System) radio business and we completed a substantial part of the transfer of some of our operations..."

Saying the firm will "take additional actions to further reduce its cost structure," Russo hinted there will be more layoffs at Alcatel-Lucent. Previously, the firm said it planned to cut 9,000 employees representing 10% of its workforce.

The firm supplies much of its product to carriers and Russo said the company expects to record a growth rate tracking the carrier market growth rate, typically in the mid-single digits.

"Together with the initial cost synergies plan, we expect to achieve combined cost savings of at least 600 million euros in full year 2007, which is 200 million euros higher than our initial synergy target for 2007," she said.

In Paris, where the firm is headquartered, investment analysts, who early on had urged against the merger, continued their grumbling. Pierre-Henry Leroy, head of Proxinvest, complained that Alcatel had paid too high a price for Lucent.

Once the key manufacturing arm of AT&T before it was broken up two decades ago, Lucent has been in a relentless meltdown in recent years.