Case Study: Alcatel & Lucent Technologies Merger Negotiations Cross-Cultural Negotiations

Sumra Khan

Contents Page
Executive Summary Question 1 Question 2 Question 3 Question 4 Question 5 Question 6 References 1-2 3 4 5 6 6-7 7 8

Executive Summary
This report examines the proposed merger between Lucent & Alcatel and the elements that led to its ultimate failure. Following, what changes occured that enabled it to succeed merely a few years later. There were several causes for the failure of the negotiations, starting with concession. Concessions are reciprocol, can be tanglible or intangible, should be planned in advance and most are given in the last 20% of the time allocated during any negotiations. Towards the end of the negotiation Lucent no longer believed it was receiving a fair deal, concessions could have been used to resolve this, giving a concession can appease but unfortunately this option was not utilised.. A further cause for failure and maybe an explaination for why a concession wasnt offered was that Lucent chose an abrupt change in strategy at the last moment to pursue their goal, this surprised the other party who may have reacted with an emotional response causing the deal to fall through. A limited time was also a problem, it added unnecessary pressure to the negotiations. Ideally, a break or a postponement to give Alcatel time to consider their options would have helped. Knowing your own and the other partys position, implies an understanding of the companys strengths and weaknesses. This is essential in negotiations to enable you to use them to your advantage and also to make informed decisions on what the deal is worth to you, this could have been a cause of failure. Finally, niether party seemed to know their own BATNA, which for Lucent was potential bankruptcy and for Alcatel was to remain in its stagnant position. Neither option was ideal and therefore if they had considered their BATNA they would have again understood why the deal should go ahead and work harder to achieve a positive result. A win-win situation was definitely possible. Both parties had the potential to gain from one another. For Alcatel this was access to the US market and for Lucent, help with its financial woes and management structure. The possible scenerios to reach a positive outcome for both parties include for Alcatel to offer either a tangible or intangible concession in exchange for the acquisition of Lucent. A better understanding of mutual benefits, through SWOT analysis and understanding their BATNA would have made both parties more willing to find a solution, ultimatly leading to a win-win situation. If Alcatel could have requested more time, it would have allowed a cooling off period for all parties to leave and gather their thoughts and return with a better attitude and fresh ideas. A smaller team may have helped to produce a positive outcome for both parties. It may have allowed a more focused meeting without the potential for emotions to be taken out of context or proportion. Less people also means less views, this can help to find a solution that pleases everyone. The last scenerio that may have helped to produce a win-win outcome was the use of a neutral territory. The place chosen was in France, this may have effected Alcatels willingness to concede at a late stage by feeling empowered by its home soil. Cultural elements are always present in international negotiations. Everyone is influenced by their enviroment. Therefore it is essential to consider this in business. In this case, the four main points of Hofstedes theories are utilised; distribution of power, tolerance of uncertainty, harmony vs assertiveness and individualism vs collective. How each of these points presents itself in the Alcatel and Lucent negotiation with a clear prominence by the US. The USs cultural influence is dominant in many aspects causing them to be noticeable. The CEOs part was also analysed including their mangement and negotiating style. Again culture came up, with the US CEO taking a more assertive results driven approach, and the

French CEO, finding the competitive approach of the other side overwhelming, prefering to walk away than feel pressured into something without consulting their team properly. It also considers the Lucents CEO personal interests, the fact that he was temporary and how it would have looked if he had handed over power to Alcatel. The question of whether a merger was the right strategy is asked. The positives were that both parties stood to gain. They could have potentially been the largest company in their industry and the first to be globalised. It would have allowed both companies to take the best of both and streamline their products, staff and company structure and as an effect of this would have eventually reduced costs. Although for the above mentioned reasons the merger would have been right, there would have also been difficulties that may have hindered its success. These include, the mix of differing cooperate cultures between French and American co-operations, investors doubts of the success of the merger, and with the overlap in products and staff, how or if it could be dealt with logistically. An alternative to the merger was entering into a partnership which was seemingly impossible to imagine working, as both companies would have been looking out for their own interests behaving as two separate entities. The last question looks at why in 2006 the merger was negotiated successfully. This was due to several reasons, a change in CEO for Lucent, who was a an experienced female in the industry, with a good understanding of Lucent and a proven track record of success. In addition, the position of the two companies had changed dramatically and they had a clear understanding of their BATNA which painted a bleak picture. Finally, they had more time and therefore less pressure to achieve an outcome and were more willing to practice reciprocity.

In your opinion why did the negotiations fail?

The planned merger of Lucent and Alcatel was negotiated over a period of two months. All major areas had been negotiated and agreed over this time. Finalising the details and paperwork was arranged over a weekend in a chateau in France at which time the merger failed and talks ceased. According to press releases, the negotiations of the planned merger failed due to Lucent wanting a merger of equals and Alcatel wanting an acquisition of Lucent. The difference in expectations relating to this aspect of the deal could not be resolved and therefore the companies parted company. An important element of negotiations is concessions, 80% of which should be traded in the last 20% of the time. Between Lucent and Alcatel this 20% period would have been the weekend in France. In addition, giving concessions almost always involves reciprocity (Nierenberg & Calero, 2009). One of Lucents points in the failure of the negotiation is that Alcatel was offering to buy it at market value, more specifically, with no premium for its shareholders and in addition wasnt offering a merger of equals. From Lucents perspective this deal was not reciprocal; Alcatel was gaining much more than them. Last minute demands are not unusual and should therefore be something that is prepared for, Alcatel could have considered offering a concession in exchange for the acquisition of Lucent. For example, this may have been a premium for the share holders or a slight increase in ownership or an additional position on the board for Lucent. From all accounts, it seems as though a relatively cooperative strategy was used throughout most of the negotiations prior to the meeting in France. Did Lucent decide to take a more competitive strategy in France in order to get the best deal? Although, not something that has been stated implicitly it would certainly seem that is the case. They had everything in place and at the last moment Lucent gave an ultimatum (Valdmanis & Backover, 2001). Adopting such an abrupt change in strategy may have taken the other party by surprise and caused an emotions driven response. Time would also have been of concern. They had a set period to complete negotiations and may have felt the pressure of it when the final issue came up. Alcatel should have requested a break to enable them to gather their thoughts and calm any negative emotions that may have arisen before responding. According to Cellich and Jain, knowing ones negotiating position and the other partys would imply an understanding of the companys strengths and weaknesses. Both Lucent and Alcatel recognized their own strengths, Lucent in relation to the US consumer market and Alcatel for its financial capabilities but did not fully understand the other partys, nor what could have been achieved with the merger. Also, they could not see the extent of their weaknesses, Lucent with its bad management structure and struggling finances and Alcatels need to increase its industry presence. Or at least, if they did, they did not take it into consideration when negotiations reached stalemate. Cellich and Jain emphasise the paramount importance of the BATNA in negotiations. Having the privilege of hindsight makes you consider if either party had considered their BATNA in their planning. What was the alternative to the negotiated agreement? For Lucent, it was to continue with the current strategy, fighting against bankruptcy and try to negotiate the sale of its fibre-optic division to an Italian bidder. Still, this wasnt enough to make a huge difference to their sinking status. For Alcatel, to remain as it has for many years before, in the background, never having a real impact in the industry and allowing younger companies to infiltrate the industry and surpass them. Evaluating both cases, it seems certain that the BATNA was missed out of the preparation phase and if it hadnt could have made both parties willing to fight for the negotiation to succeed.

Q2. Was a win-win outcome feasible? Describe the various scenarios that the

negotiators could have adopted to reach a satisfactory agreement.

A win-win outcome was indeed feasible. For the deal to have been so close to closing gives a strong indication of that. Both Lucent and Alcatel seemed unprepared for any last minute changes. They arrived to the chateau believing the deal had already been done and this was a formality. When the issue was raised, it should have been discussed fully to recognize what both parties wanted and where any room to negotiate remained. According to Nierenberg & Calero, concessions should always be available for any issues or requests raised towards the end of the negotiations. It is essential to recognise that concessions can be either tangible or intangible and if Alcatel did not want to move on the price, as seemed was the case then instead a high profile position in the new company, with responsibilities that match may have been an alternative. Or enabling Lucents senior management to be involved in the merger and streamlining the new company. Both parties would have still had a positive outcome but one may have been a little more worse off. A better understanding of mutual benefits of the merger would have ensured they maintained an open and flexible attitude which would have allowed the talks to continue and producing a positive outcome for both. This would have been through SWOT analysis and ensuring any points of uncertainty are tackled at the start. As mentioned in question 1, understanding each of their BATNA would have allowed them to negotiate with a clear picture of the alternative. Due to the feeling of the final meeting in France being just a formality, the time was compounded. This added extreme time pressure, also knowing that the eyes of the media and shareholders were on them. The shares were tumbling and there would have been a fear that taking more time would further exacerbate the situation. However, more time is what was needed. Time to consider alternatives and calm any irrational feelings that may have arisen from the CEOs abrupt approach or issue. In addition, if time wasnt a problem and a break wasnt enough, rescheduling would have been another option. Clearly, both sides needed the deal and could have gained from it so taking time away would have allowed them to return with fresh ideas and attitudes (Cellich, 2011). The size of the team was extremely large, fifty people (Weiss, 2010). This can cause problems when wanting to make decisions efficiently. This can also cause any emotional reaction to be taken out of proportion and encourage a them against us attitude. A reduction in team size with the key decision makers only would have increased a positive outcome for both parties . Finally, the closure meeting was held in France, this may have made Alcatel feel as though they had more power to say no. A neutral location would have made both parties feel out of their comfort zone and on an even kiln, helping the negotiations at the crucial moment and giving a win-win outcome.

Q3. How did cultural barriers influence the negotiation?

Culture: Shared ideas, values, customs, and social behaviour of a particular people group or society Cross-cultural negotiations can be extremely difficult when combined with business negotiations. In the case of Lucent and Alcatel you have a potential clash of American and French cultures. Areas of consideration include differing, languages, non-verbal communication, protocol and time interpretation to name a few. Hofstedes research into this area names four key areas of consideration, distribution of power, tolerance of uncertainty, harmony vs assertiveness and individualism vs collective. Distribution of power Considers a societys view of acceptable inequality. In certain countries, power within a business environment is concentrated among a few at the top. These individuals are the ones in the position to make key decisions and those below them are responsible for the implementation of them. At the other extreme, there is a much broader dispersion of power where individuals of differing levels within an organisation are expected to be involved in making decisions. Both sides seem to have a relatively broad dispersion of power, the final stage of negotiations were attended by 50 people of differing levels indicated this. Tolerance of Uncertainty Considers how comfortable people are with uncertainty, unstructured situations , processes or agreements. According to Hofstede, the US has a low uncertainty avoidance, this is demonstrated in the willingness to make quick decisions in this scenario, take a huge risk even with the knowledge of the potential of losing the deal. Harmony v Assertiveness Differing cultures value masculinity over femininity or vice versa. Masculinity refers to assertiveness, performance and success and femininity places greater importance on personal relationships, solidarity and service. The US is known for its respect of masculinity and assertiveness. The Lucent CEO demonstrates these traits by asserting his requirements in no uncertain manner to claim success for the negotiation and validate his performance. Individualism vs Collective Individualistic cultures are driven by own interests, they show little loyalty to their company and are competitive by nature. The US is an example of such a country and as stated in question 4, the Lucent CEO demonstrates all of these traits and may have been the one of the key reasons for the failure of the negotiation. In addition, the Lucent CEO wasnt even a long term employee of the company. His individualistic cultural mannerisms and self-interests were an overriding factor relating to his behaviour (Cellich, 2011).

Q4. How well did the CEOs lead and manage the negotiations? Did they have

special or personal interests that influenced the negotiations?

According to all reports in terms of the team involved in negotiations there was no major conflicts between the CEO and the team. In terms of the negotiations, the CEOs involved were culturally very different, according to Cellichs lecture on cultural differences Lucents CEO would be classed as a type 1. That is, more interested in short-term goals instead of long-term relationships. This is demonstrated by his management of the issue that was to become the deal breaker. He felt no concern to give an ultimatum and pressure the other party at such a late stage even after several months of negotiating. This is also a trait of type 1 cultures, the ability to make quick decisions and a willingness to take the risks necessary to achieve the desired outcome. The Alcatel CEO was French he is viewed as a type 2 culturally. Meaning, relationships mean more and decisions take time. To have been given an ultimatum at the last moment would have been seen in bad taste. Also, to have made a big decision would have required consultation with other members of the team. With the time constraints this may not have been possible. The differing styles of negotiations would have conflicted with one another especially if both parties were unwilling or unable to adapt. Specialist interests may have included US pride. An article in the New York Times (2001) states that the reason for the negotiation break down was because of the difficulty of justifying the loss of jobs and national sensitivity for the loss of one of Americas proudest legacies It would also seem that the CEO of Lucent had ulterior motives relating to personal interests. Here is, an interim CEO that in the final hour recognized that his legacy in Lucent would include, the loss of his position, the take over of Lucent by a European company and with that, the loss of power for both entities. However, if he had managed to successfully take a last minute concession and close the deal, his legacy would be that of a hero. This thought may have driven the CEO to choose a make or break strategy. An aggressive approach to gain a last minute concession, that no one expected or no deal.

Q5. Was the merger the right strategy? What else could the firms have considered to meet the competition?
The merger had the potential to have a very positive impact on both companies and was definitely the right strategy in some ways. Both companies would have gained a bigger market share, Lucent in Europe and Alcatel in the US. They would have been the biggest of their kind and the first to become a globalised entity in the industry. By taking two relatively successful companies and merging them, it would have allowed a collaboration of products, staff and procedures from which they could have streamlined with the best of both. This could have resulted in reduced costs and a far superior end product. There are of course elements that may have caused problems to hinder the process, enough for it no longer to be the right strategy. The mix of cooperate cultures may have caused problems whilst attempting to conform management styles or even employee work ethics. The differences between French and American work styles are extensive. In addition, the mix and overlap of networking products may have worked but had the potential to become a huge logistics problem. Finally, the investors had little or no faith in the success of the merger and voiced their uncertainty by selling shares, resulting in a reduction of 16% from the announcement of the deal.

Lucent and Alcatel could have considered creating a partnership but this would have been a greater challenge. Both firms would protect their own interests, the overlap in technology between them wouldnt have been resolved and the cultural differences would clash as the companies pull in different directions. The third option is a complete takeover, this of course would be great for Alcatel but for Lucent the loss of company would not suit shareholders especially to a European company. This was never an option when Lucent wasnt even willing to take a 42% share.

In 2006, the two companies successfully merged. What did they do differently than in 2003?
Both companies suffered huge losses during the period of 2003 to 2006. Lucent had a new, female CEO in place and adopted a cooperative strategy, this is in line with the argument that woman negotiate differently to men. With this strategy, woman are less likely to run into deadlocks in negotiations (Babcock & Laschever, 2003). Although, it was a woman in a predominately male oriented industry she had vast experience in the industry and had proved her abilities on numerous occasions. She had been part of Lucents workforce in senior positions for many years and would therefore have earned the respect of her peers. The last point of a contention between the parties from the previous negotiations took nine additional days to resolve, an increased length of time then was available before. There was a increase in the board of directors for Lucent but there was also a change in headquarters for the company, from New York to Paris. This is an intangible concession for Alcatel but means that the company will ultimately be viewed as French. BATNAs are dynamic and in this case had changed dramatically since the last negotiation. Both companies seemed to have a clear understanding of their BATNA, recognizing the alternative to a negotiated agreement was bleak.

References Babcock, L & Laschever, S. (2003) Women Dont Ask:Negotiation and the Gender Divide. New Jersey, Princeton University Press, pp 223.
Cellich, C. (2011), Time, Lecture, International University of Geneva, unpublished. Cellich, C. (2011), Culture in Negotiations, Lecture, International University of Geneva, unpublished. Cellich, C & Jain, S. (2004). Global Business Negotiations. USA, South-Western. Nierenberg, G. & Calero, H. (2009) The New Art of Negotiating: how to close any deal, Square One Publishers, NY, USA. Planner, E. (2001). Failure of Alcatel-Lucent Merger Talks Is Laid to National Sensitivity in the US: Pride and Prejudices The New York Times. Valdamanis, T & Backover, A. (2001) Lucent Ditches Alcatel at the Last Second, USA Today. Weiss, S. (2010) Analysis of the Alcatel-Lucent Negotiations: Insights for Researchers and Practitioners Available: https://conference.cbs.dk/index.php/negconf/negconf/paper/view/73 Last accessed 15th Feb 2011