Alcatel fights for slice of a shrinking pie Alcatel-Lucent has been one of the more ill-fated mergers from the pre-credit crunch era, with the four-and-a-half-year attempt to return the Franco-American tie-up to profitability finally proving too much for chief executive Ben Verwaayen last week. Shares in the group initially bounced higher on confirmation of the end of his tenure, which failed to meet his basic objective of returning the group to "normal." However, shares fell again on the realisation that there would not be a short-term fix. Mr Verwaayen departure's had been well rumoured, not least after a striking mea culpa last year when he told the Financial Times that blame lay with the management. Analysts have expressed concern that finding a replacement will be only the first of the considerable challenges for the company. Pierre Ferragu, analyst at Bernstein, said: "The change of management does not address Alcatel's structural problems. On the contrary, we are concerned that it may presage further difficulties for the company. Mr Verwaayen implemented a restructuring programme to cut 5,000 jobs and €1.25bn from costs, but analysts predicted that this would need to be the beginning, not the end, of the overhaul. "The golden question I am always asked is: can technology companies survive at all in Europe?" said Mr Verwaayen in an FT interview last week. My answer is - yes, as long as you adapt. While some analysts still whisper the bogeyman's name - Nortel, the Canadian telecoms group that went bust in 2009 - the risk of bankruptcy at Alcatel has receded given €2bn of financing secured earlier this year against the company's portfolio of 29,000 patents. It still faces long-term challenges in a market where consistent price erosion has been caused by economic and technological change as well as intense competition from cheaper Asian rivals. These threats were largely non-existent when France's Alcatel and Lucent in the US merged in 2006. There are too many large groups fighting for a slice of a shrinking pie that has changed its flavour since Alcatel and Lucent merged, according to one sector executive. He predicted that there would need to be consolidation to reduce five groups - Nokia Siemens Networks (NSN), Alcatel, Ericsson, Huawei and ZTE - into three sustainable businesses. However, such moves will not be easy, according to bankers in the sector, and those close to the company play down recurring rumours of a tie-up with NSN. Alcatel itself is an example of why a merger is not always a solution, given its struggles to reduce costs sufficiently since the $11bn deal. Analysts at Berenberg estimate that revenue per employee metrics do not look attractive at $280,000 per employee, against NSN at $320,000 and Ericsson at $330,000. Rivals are not in rude health, even if they appear further along than Alcatel in changing their business models to cope better with market conditions. NSN in particular cut 17,000 jobs to orchestrate its recent return to profit. It is not all bad news, though. Alcatel's key market in the US - where it is the main supplier to AT&T and Verizon - looks safer than its precarious European situation given Washington's suspicions over using equipment from Huawei, Alcatel's Chinese rival. US carriers such as AT&T are spending more on equipment and network upgrades, a counterpoint to the depression among larger customers in Europe looking to squeeze budgets. China is also a key factor for 2013 given the likelihood that China Mobile in particular will invest significantly in new networks. While ZTE and Huawei are likely to benefit, there should also be contract wins for European suppliers already conducting trials in the country. Alcatel also has assets to sell to raise cash if necessary, most obviously its submarine cabling arm, and there could be state support. Fleur Pellerin, the French digital industry minister, said the state would be willing to step in to take a stake in Alcatel assets that it did not want to allow to fall into foreign hands. The group has formulated a new three-year strategy, although this would be subject to change with the incoming chief executive, those with knowledge of the company's plans acknowledged. Speculation in Paris about Mr Verwaayen's successor has centred on internal candidates, including Stephen Carter, the group's European president, Philippe Kerrier, the French network chief, and Paul Tufano, finance director. Mr Verwaayen conceded that the company needed a "fresh pair of eyes" to examine the company's problems and implement the strategy. He said the strategy centred on much tougher cost management, slashing the number of products and markets where the company operates and building the services business. We can't be everything to everybody. Despite its problems, Mr Verwaayen insists that Alcatel "cannot only survive, it can thrive as well." Analysts are not convinced. Mr Ferragu paints a scenario of default for Alcatel around January 2015 should there be no additional disposals, and another where the company "would still run out of cash around mid-2015" even with the sale of submarine and enterprise units. Similarly, in a January note, Citi asked whether Alcatel was the new Nortel given parallels in business mix, strategy and capital structures. Citi's answer of "maybe" will not be reassuring for investors as the group seeks the new normal that Mr Verwaayen could not find.