Martina Hund-Mejean knew
the picture was not a pretty one at Lucent Technologies
Inc. when she agreed to become its new treasurer in
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November 2000. In about a year, its high-flying stock
price had tumbled to an anemic $15.50 from a high of $82
a share in December 1999, and Lucent's revenues were
shriveling up amid a technology sector implosion. That
was part of the allure
a company in distress and rebuilding its once impressive
credentials. But she didn't know how ugly things truly
had become, especially on the finance side, until she
agreed to prepare a report for her new boss, CEO Henry
Schacht, only days after she had arrived at the
headquarters of the erstwhile telecommunications darling
in Murray Hill, N.J. I realized the task was going to be
bigger than I anticipated, she recalls now. The picture
she painted for Schacht was of a finance department that
had been totally marginalized by a sales and marketing
team intent on selling even if a deal was unprofitable
for Lucent. Warnings about the creditworthiness of
customers went unheeded in the pursuit of revenues. The
solution to doing business with those without the proper
wherewithal: extend enough Lucent-backed financing to
seal the deal and keep revenues growing at the
double-digit rates that Wall Street liked. As a result,
the four-year-old spin-off from AT&T Corp. was
burning through its cash at an alarming rate<$2.2
billion in the 2001 fiscal first quarter ending Dec. 31,
2000, alone.
Restive
Creditors
But there was more: No
one at Lucent had been talking to its creditors as its
fortunes slid. And by this point in the Lucent saga, the
banks were panicking, not to mention hopping mad. It was
not a very desirable situation for a company facing a
liquidity crunch that, in a matter of weeks, would force
it on hands and knees to these same financial
institutions. It
was hardly the scenario Hund-Mejean, 41, expected to
find when she joined Lucent after 10 years at General
Motors Corp., where she last served as an assistant
treasurer. Not that then-Chief Financial Officer Deborah
Hopkins wasn't honest when she offered Hund-Mejean the
job. Hopkins said things were bad, and I was leery,
admits Hund-Mejean. What Hopkins didn't spell
out
liquidity problem.
That cash crisis would
essentially preoccupy Hund-Mejean for the next nine
months. But by reviving credit facilities and banking
relationships, she ultimately created a foundation upon
which to rebuild Lucent's financial health and its
credibility on Wall Street. The work Martina Hund-Mejean
and that treasury department have done is enough in my
mind to indicate that Lucent is now financially stable,
says Steven D. Levy, a technology analyst at Lehman
Brothers, who had long been critical of Lucent as it
unraveled. They've stemmed the tide of irresponsible
vendor financing and are putting in some financial
discipline that could ensure profitable revenues.
Frank D'Amelio,
Lucent's current CFO, says that while the company has
made progress, he is not prepared to say that the work
is done. We've had a cash flow improvement, our EPS
has improved, our vendor-financing portfolio has gotten
smaller and our headcount has gone down, says D'Amelio.
But we are still losing money and generating negative
cash flow. We know there is still a lot more work to be
done. Where we are is not sufficient. D'Amelio, 43,
became Lucent's CFO in May after Hopkins, with only
about a year on the job, was pushed out just as many of
the steps she had taken to restructure the company's
finances were producing returns.
The key to Lucent's
success to date
at $6.30 a share on Dec. 17, falls far short of anything
resembling a reversal of fortunes
making the finance department an integral part of the
entire corporate structure. Going far beyond just
putting a cap on the company's storied vendor
financing, which had ballooned to more than $8 billion
by the time Hund-Mejean joined Lucent, the task meant
overhauling the system to ensure sales would be working
in lockstep with finance. The finance staff at Lucent
was not fully integrated into the business, and their
roles were not laid out clearly, Hund-Mejean says. We
had to get out of the black-box syndrome and educate
people about cash and why it was important. Once it was
explained, people were on board.
Indeed, the Lucent story
has become less a lesson on innovation and more about
the importance of imposing some common sense on a
company that in many ways operated without it. And in
that respect, it may prove to be a cautionary tale for
the entire technology sector: Growth for the sake of
growth, without controls, is the road to chaos. Or as
many 20/20 market hindsighters might now put it, a
company ultimately will be judged by its profits and not
its revenues.
First
Step: Get Credit
This transformation of
the finance department and treasury started with a $6.5
billion credit facility that Hund-Mejean negotiated in
February with J.P. Morgan, Salomon Smith Barney and a
syndicate of banks. It proved to be a clear signal to
Wall Street that Lucent's revitalized treasury team
was serious about trying to establish a new era of
openness with the banking community. To be sure, though,
convincing the creditors and getting the deal done
didn't occur without some arm-twisting by both sides.
Lucent was in desperate
need of cash, and had a $2 billion credit facility
expiring at the end of February. At the same time,
Lucent was putting together a $3.6 billion initial
public offering of its Agere unit, a maker of
communications components that it was eager to sell amid
worries that Agere's ties to Lucent could hinder its
potential to do business with Lucent competitors.
Hund-Mejean saw an opportunity to use Agere's IPO as a
tool to negotiate the credit line for Lucent. Her plan
called for banks to structure a credit facility for $6.5
billion, with $2.5 billion of the debt to be assumed by
Agere. Because Agere had a good story, [that part of the
arrangement] was not a tough sell to the banks,
Hund-Mejean says. The $4 billion was more of a
challenge. We had to provide a plan, so the banks could
see how we could support it.
To answer mounting
questions from the lending community, Lucent held a
giant meeting involving 150 bankers from 40 banks. We
explained what had happened at Lucent, and laid all of
our cards on the table. Eyes went wide, she says,
recalling the sea of shocked faces in the audience. It
didn't stop there. Finance executives had one-on-one
meetings with bankers and held 40 individual
due-diligence meetings, with Lucent setting up the
meetings rather than the more common practice of a lead
agent coordinating the sit-downs. Still, some banks had
reservations, prompting Hund-Mejean to take a more
aggressive approach. If the banks would not negotiate a
new credit line, she would simply draw upon the as-yet
untouched $2-billion credit line that was coming due at
the end of month. Hund-Mejean was essentially telling
bankers, Do it with me or I'll do it alone. The tactic
worked, and sent a message to banks that she was serious
about shoring up Lucent's finances. Our No. 1 priority
was to get to know the banking community, Hund-Mejean
says. From that point on, we had quarterly calls with
banks to explain to them what was going on with the
company.
Vendor
Financing Fiasco
As they put together the
credit facility, Lucent's treasury team was
simultaneously dealing with its vendor financing
debacle, which had gotten so unwieldy that few within
the company had a handle on the severity of the problem.
Controlled primarily by Lucent's sales department,
treasury had little participation in reviewing finance
deals inked by its sales staff. When a finance official
did nix a proposed financing, sales people often went up
the executive food chain until they got the approval
they needed. The strategy helped fuel the 20% growth
rates that Lucent had been famous for, but pummeled the
company's finances. By Sept. 30, 2000, Lucent's
vendor financing portfolio had hit $8.1 billion, with
many of the loans made to startups that have since
folded or filed for bankruptcy. I would say that more
than 50% of Lucent's problems are due to the vendor
financing, says Cecilia Ricci, an economics and finance
professor at New Jersey's Montclair State University
who teaches courses on Lucent's vendor-financing
problems. At the time, everyone loved it
people money to buy your products. But the problems that
came from it were absolutely amazing.
To reverse what was
becoming an insurmountable tide, Lucent tapped Bank of
America to do a top-to-bottom review of its
vendor-financing program. The process took two months
and revealed shortcomings ranging from the absence of a
document review room to the lack of a loan-monitoring
mechanism. Lucent officials decided that if they were to
be in the lending business, they would need to mimic
banking institutions' practices and begin taking
reserves on every draw of a credit line. But it didn't
stop there. Lucent sharply curtailed its vendor
financing, only extending loans to companies that passed
the muster of a newly created credit review committee
that now meets weekly. Existing loans were restructured.
The moves have made gains: Lucent trimmed its
vendor-financing exposure by 32% to just over $5.5
billion by June. The challenge for us is now making sure
that we can help our customers leverage other people's
money, Hund-Mejean says. We want to help them craft a
new solution, yet not have it on our balance sheet.
The work didn't only
involve the balance sheet. Hund-Mejean also looked at
how her treasury team could better position itself to
guide the company through the work that had to be done.
Her answer? Growth. At a time when many treasury offices
were shrinking
workforce to 77,000 in September from 106,000 at the
start of 2001
team of six lieutenants who handle functions like
investor relations, workouts and customer finance, and
bolstered that with support staff. Today, the department
totals 166. Hund-Mejean also is trying to turn her
treasury department into a training ground, much like GM
has been for treasury professionals like herself. She
has a rotational training program for recent MBA
graduates to work in various treasury departments to get
a better understanding of how the department works.
Today, Lucent is in many
ways a very different company, as discipline imposed by
its finance department has helped streamline the
business. Hund-Mejean says she has the right amount of
liquidity, the vendor-financing business is under
control and, perhaps most important, the company burned
through just $281 million for the quarter ended Sept.
30. But while in some ways it is a very different
company, it still suffers from many of the same problems
it had a year ago.
The
Long Haul
To be sure, Lucent has
embarked on Phase 2 of its restructuring, which includes
plans to shed more businesses and reduce overall
headcount to between 57,000 and 62,000. But some argue
its product line hasn't kept up with the progress made
in finance. Despite its history of innovation, Lucent in
recent months appears to have been slacking off, missing
opportunities to stay in the game with competitors like
Nortel Networks. D'Amelio acknowledges that at one
point, our clocks were being cleaned, but argues that
Lucent's new products are doing quite well. Its
optical business, for instance, has dominated its
competitors for the last two quarters. The company is
also making a big bet on the next generation of wireless
technology, as well as a tiny transistor that could make
computer chips operate even faster. But significant
questions remain. Among them: Will Lucent be able to
remain independent after its failed merger attempt with
French telecom Alcatel? Can the company regain its
focus, much less return to profitability? How will the
industry's woes affect Lucent's ability to stage a
comeback, especially in light of a recent warning that
the industry slowdown will hurt revenues?
Even with D'Amelio and
Hund-Mejean's success, Lehman's Levy
rated Lucent stock a strong buy
pat Lucent executives on the back just yet. Financial
stability alone is not going to lead towards growth, he
says. Meeting customer demand is. We think they are
doing better at that, but the evidence is not
conclusive. He is even less certain about Lucent's
future as an independent company: I have no doubt that
they can go it alone, but whether they will or not, I
don't know.
Of course, the wild card
in a lot of the crystal-balling about Lucent is the
future of the tech sector itself. D'Amelio projects
that 2002 could bring with it a market decline of 20%,
which could derail Lucent's progress
Lucent's spirit, he says. It's a challenge, but this
market will turn, he says. We are a company that is
about financial fundamentals, and we are about
profitable growth for our customers and ourselves. To
me, this is all about the whole industry returning to
fundamentals.
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