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Alcatel-Lucent's new CEO, Ben Verwaayen, faces his toughest day yet when he presents his turnaround plan to shareholders. The CEO has a strong track record, having transformed British Telecom, but arguably ALU is an even bigger challenge, having failed to overcome many of its post-merger teething problems, lost 65% of its market value this year alone, and entering a recession before its cost cutting programs have had time to take effect.

The bare bones of the plan were released in a statement ahead of the shareholder meeting, though further detail and analysis will be available after noon UK time. ALU is to cut 1,000 managerial jobs and cut expenses by €1bn ($1.3bn) in each of the next two years, a significant increase on previous cost cutting targets. This will make adjusted operating profit break even in fiscal 2009, said the company, despite an expected decline of 8-12% in the telecoms equipment market (at constant exchange rates), where ALU is number one in fixed line and number three in wireless products. In 2010, the company is targeting a gross margin around the mid-30s and a mid-single digit operating margin.

Analysts were not overwhelmed by the headlines of the plan, though many admitted the devil would be in the detail, particularly how ALU would seek to build growth in new areas like services. The main concern is that, while the plan makes sense on paper, the merged giant has a poor record on execution - though Verwaayen himself has an eviable track record, which should boost confidence. "Alcatel-Lucent's track record in translating restructuring gains into cost savings and margins is not particularly encouraging," said Gareth Jenkins at UBS in London in a recent research note. Andrew Griffin at Merrill Lynch in London echoed this sentiment to Bloomberg yesterday. "It is hard enough as it is to restructure a business. It is doubly hard to do it during the worst downturn since the Depression."

So while Verwaayen has already squashed rumors that ALU would exit the mobile infrastructure market altogether, he will still need to propose some radical changes if he is to win the confidence of disillusioned shareholders. Top of their wishlist will be an effective plan, at last, to integrate the company's two halves seamlessly (and its other acquired businesses like Nortel's W-CDMA operations and its Fujitsu mobile venture); plus a stepped-up cost reduction plan that will deliver the $15bn savings targeted in merger synergies as well as bit more to adjust to the downturn.

Only with the company clear about these two operational goals will it be able to mount a convincing defense against its key challenges - the scale and price aggression of market leader Ericsson in wireless, and the rise of the Asian rivals, especially Huawei, which now has its feet firmly under the table in many of ALU's markets. A leaner cost structure will help with this, but ALU will also need to put flesh behind its more positive responses, already hinted at this year, such as a major shift to managed services and a heightened focus on convergence and LTE, at the expense of the declining CDMA business where it remains market leader.

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