Lucent's CEO McGinn Removed

This past weekend Lucent's board of directors made an entirely unsurprising move by removing Rich McGinn as CEO of the company. After three consecutive quarters with earnings warnings -- and no evident plan to attack the problem -- the board decided to decapitate a management team that was increasingly thought to have lost its control over vast portions of the company. The interim CEO, a former chairman of the company, may not be much better.

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By Bill Mann (TMF Otter)
October 23, 2000

In what has to be the worst concealed and most drawn out conclusion since James Cameron took three hours to show us that the Titanic thing ended badly for most of the occupants, Lucent Technologies (NYSE: LU) fired CEO Rich McGinn over this past weekend. After three consecutive quarters of earnings warnings, the board of directors decided that it would be best to find a CEO with "a different set of skills."

While Lucent shareholders are justifiably pleased that McGinn has been removed after a painful series of missteps, they need to understand that Lucent's management and business model is, in fact, rotten to the core. So just as the defenestration of Nikolai Ceausescu did not turn Romania around, there is a great deal of things that are going to get worse at Lucent before they get better.

One of the leading analysts covering Lucent, for example, pointed out that Lucent did not have three bad quarters. Rather, it kept having the same bad quarter over and over. The company refused to take its medicine to flush its system, choosing instead to operate in the hope that it would not have to restate further.

As long as revenues were increasing, and income statement profits and revenues were growing, there was little pressure to reform. But when a company has a system that promotes packing the sales channels, eventually the channels are going to break. Lucent can try to blame the downturn in purchases and the bad debt racked up by some of its customer base, but this does not change the fact that Lucent freely and willingly gave generous credit terms to some very shaky customers.

McGinn's greatest sin, in hindsight, was unquestionably this: He failed to manage either the cash or the product cycles of his company. But only just behind that, the sign of a truly outstanding leader would be one who can, upon being presented with a strategy that was erroneous, quickly and decisively make it right. Oracle (Nasdaq: ORCL) did it. Corning (NYSE: GLW) did it. Nortel (NYSE: NT) did it. Lucent did not.

The interim CEO? Another Lucent insider
Lucent has named former Chairman Henry Schacht as the interim CEO and is opening up an immediate search for a new CEO. Schacht comes over from Lucent-spinoff Avaya (NYSE: AV), so he's definitely what you'd call an "insider."

Although Schacht is quite familiar with the business, his position of authority at Lucent in the recent past should make investors question whether he was anymore willing than McGinn to address the problems facing the company. I am always skeptical of companies and managements that suddenly choose to practice fiscal prudence, particularly under duress. A company is either prudent at its core or it is not. Perhaps Lucent's next CEO will have both the authority and the willpower to change the system at the company, improving cash management and speeding up product cycles.

If not, one of the most impressive collections of brilliant minds, powerful intellectual property and capital resources ever assembled will likely fade into irrelevance. That would be the true tragedy.

For more on Lucent, see today's Fool Special, "Lucent At Bat," which takes a look at the company's stumbles over the last year.

Your Turn:
We're conducting a poll on the Lucent discussion board. Come share your opinion about the following:

Where should Lucent turn next for its CEO?

a. From its considerable stable of talented management.
b. From one of its competitors (Cisco, Nortel)
c. From one of its customers or vendors (AT&T, JDS Uniphase)
d. From outside the industry entirely (a la Lou Gerstner from IBM)
e. Shoot, I could do a better job.


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