Wanted: CEO for promising but troubled tech giant

Lucent's board of directors announced Monday that it has removed CEO McGinn as the company's financial outlook has taken another hit. The struggling telecommunications equipment giant announced Monday its fourth profit warning of the year as it installed McGinn's mentor--former Lucent chief executive Henry Schacht--as its interim leader.

Schacht said he will immediately launch a search for a permanent replacement, but he may find Lucent a tough sell.

Analysts say it's imperative that the next chief have a telecommunications and networking background, but many of the industry's best and brightest are ensconced at hot optical networking start-ups. And potential candidates may be leery of taking over a company that's in need of a major overhaul.

Some analysts said Lucent's predicament is so acute that a one-two punch of new CEOs may be needed.

"They need a turnaround specialist for the next two to four quarters, then bring in a different kind of leader to take Lucent to its next phase--for the next five years," said analyst Bill Lesieur, of industry watcher Technology Business Research.

Analysts believe most potential candidates would prefer senior executive positions at rivals like Cisco Systems or Nortel Networks, or at a start-up with good potential, over going to struggling Lucent.

"They're obviously not going to get someone from Cisco. People leaving Cisco are going to start-ups and venture capital-oriented type of opportunities, not big companies," Lesieur said. "And it's hard to transplant a top executive in another industry in technology because networking and communications is so complex."

Analysts say Lucent's decision to tap Schacht, a veteran AT&T executive, is a sign that the company had no succession plan in place. Schacht was Lucent's first chief executive when it spun off from AT&T in 1996, but he was replaced by McGinn a year later.

"This underscores how fast this has unraveled for them," said Martin Pyykkonen, of CIBC World Markets. "Schacht is bringing in some stability because he's known internally, so one thing they're hoping to prevent is a massive brain drain. At least he brings some reassurance as people see the business model unraveling and the stock doing poorly."

After years of financial growth, Lucent is facing its most significant problem in its young history since its spinoff from AT&T. In a year in which competitors, such as Ciena and Nortel, and emerging players, such as Juniper Networks and Foundry Networks, are seeing huge revenue growth and soaring stock prices, Lucent has seen its stock plummet about 75 percent from its 52-week high of $84.

McGinn's successor will take the reins of a company in the middle of a major reorganization and in need of a revised product strategy, analysts say.

Lucent, which recently spun off Avaya--its corporate networking business--is now in the midst of a similar move with its lucrative chipmaking and fiber-optic component business. Lucent is also reorganizing its corporate structure to find ways to pare down costs.

"This is not a quick fix," Pyykkonen said. "This is not bring in a turnaround SWAT team and everything will be fine. That's part of the strategy, and it's part of the near-term tactics they need to take, but the bigger question is stimulating revenue growth."

Pyykkonen said Lucent's trouble areas include optical equipment and high-end Internet gear that service providers use to shuttle vast amounts of Internet data from one point to another at high speeds. Cisco and Juniper are leaders in the lucrative market for high-end Internet equipment, but Lucent has yet to come up with a competitive offering.

Earnings warnings
In its first profit warning in January, McGinn blamed Lucent's first-quarter earnings shortfall on the company's inability to meet customer demand for optical networking equipment, lower software sales, and flat growth in wireless equipment.

Lucent executives at the time said the company was too slow to respond to the need for higher-speed optical equipment, allowing Nortel to take an early lead in the exploding market. Optical equipment allows service providers to send larger amounts of Net traffic across their networks at faster speeds.

After working to correct the problems by increasing manufacturing of optical equipment and announcing new products, Lucent rebounded the next two quarters by reporting better-than-expected profits.

But the company in July warned of weaker growth in the fourth quarter. Lucent executives blamed a faster-than-expected decline in the company's traditional voice equipment, which is not expected to be offset as quickly by the introduction of newer Internet-based products, such as optical and wireless equipment.

Two weeks ago, the company issued a third earnings warning for many of the same reasons: lower-than-expected revenue from its optical networking business, decline in the sales of traditional voice products, and potential bad loans to emerging service provider customers.

While the company has resolved its manufacturing problems for optical equipment, sales will decline 5 percent this quarter because service provider customers are still testing the equipment before deciding whether to buy it, McGinn said.

Plenty to offer
Despite Lucent's challenges, the company has a lot to offer for an incoming chief executive, analysts say. If picking a job is like choosing a stock--buy low, sell high--then Lucent might be attractive to the right executive.

"Lucent is hitting a low in its short history, but there are a lot of strengths within the company. Somebody just has to remodel it," Lesieur said. "Lucent has good technology, relationships with carriers old and new. They have leadership positions in communications equipment. And they have a good reputation, even though it has been diminished a little bit."

In the meantime, Lucent's corporate debt was placed on Standard & Poor's CreditWatch with negative implications on Monday, after McGinn's ouster and the company's latest earnings warning.

A negative CreditWatch placement usually indicates a high likelihood that the rating on a company's corporate debt will be lowered in the next quarter or two, said Bruce Hyman, an S&P spokesman.

And the lower a credit rating, the more difficult and expensive it can be for a company to raise money by issuing corporate debt. Companies typically have to offer higher interest rates on their notes to attract investors, who may be somewhat skittish with a poor credit rating.

Lucent has a strong credit rating in the A range, which is on par with competitor Nortel, Hyman said.

News.com's Ben Heskett and Dawn Kawamoto contributed to this report.