Alcatel Lucent: A Minnow in a Pond of Sharks
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French telecom equipment company Alcatel Lucent (NYSE: ALU) is in the midst of a major corporate restructure, has bad debts, and its share value is just over 14% of what it was when the two companies merged in 2006. Despite its large size in 2006, it is a minnow in a pool of sharks now, and will not have high profit margins if it is to compete with its much larger competitors such as Ericsson (NASDAQ: ERIC) and Hauweii. Signs are though, if you have money in it now you won't lose it, as what it has done to date has ensured survival.
New Chief Executive Michael Combes, who began his job on April 1, announced internal cost cutting of over a billion Euros in June. This will involve a sizable reduction in staffing and pulling out of loss making contracts where possible. He also announced a sale of $719 million of convertible bonds, which can be swapped for shares in 2018 to restore profit to the ailing company. Its credit rating is currently listed at B3 at Moody's Investors Service (six steps below Investor Grade).
Alcatel Lucent has been restructuring almost constantly for the last five years, and is on its third CEO since the process began. This, alongside years of losses, has impacted its valuation and credit rating. From around $14 a share in June 2007, at one point the share price dipped to $1.04 a share as people worried about bankruptcy in October 2012. To date, it has recovered and sits just below the $2 mark.
Company restructuring will involve massive job losses worldwide. As it stands, it employs 72,000 workers but this will fall significantly in the coming year. The company is in talks with the French government, which has made it clear that it will object to major job losses in its country.
The company is refocusing on its core businesses of Internet Protocol, or IP, and very high speed broadband products. Alcatel Lucent's IP business is showing potential, with high year on year growth. Reuters reports that the company aims for "for sales of IP products, which help direct data traffic inside telecom networks via specialized routers, to grow by roughly 15% to more than 7 billion Euros by 2015, or about half of group sales."
Research budgets will go into the growth side of the business too. Its seven time Nobel Prize winning Bell Labs will have major investment as the company tries to attract the best researchers in the field to them while reassuring new clients of its commitment to growth in its core business.
In June, Alcatel Lucent announced a 3 year deal to use Alcatel Lucent's software and services to manage Norway based Telenor Group ASA's networks in 11 countries. Alcatel Lucent said that this is part of its core focus after the company's restructure. Such deals may well help pave the way toward profitability.
Initial response to this is promising. Societe Generale SA analysts wrote that "The potential for a more streamlined and better positioned business is offset by near-term execution risks and higher cash restructuring charges."
While the major rival of Alcatel-Lucent is still Cisco Systems (NASDAQ: CSCO), Ericsson also needs be taken into account, as these businesses keep adapting to the evolution of smart devices. Because there are so many smart devices now, there's a big opportunity for some rival companies to succeed. According to Ericsson’s forecast in its Mobility Report of June 2013, subscriptions to such devices will multiply three times by 2018 as compared to 2012, bringing the number of smartphone subscribers from 1.2 billion in 2012 to approximately 4.5 billion in 2018.
Conversely, Cisco Systems has been acquiring several smaller businesses, concentrating on those that are creating 4G LTE networks since it wants to beat its rivals in this market. 4G LTE provides high-speed information and broadband connections utilized by cell phone technology and data terminals. Broadband and network businesses are continuing to expand with such high-speed networks to keep up with the demand for smartphone technology.
In an attempt to have an advantage in 4G LTE over its competitors, Cisco acquired BroadHop on January 15. The policy control solutions of BroadHop, which have been distributed across many regions for both fixed and mobile networks, will now become the company standard.
The restructuring and refocusing of Alcatel Lucent will ensure its survival and takes it off life support. In the face of competition with very big fish, it is far from being a company to invest in to make fast gains. Recovery from the brink will take time (don't expect a $14 share price ever again, but don't expect investors to lose what they have in it already). Bankruptcy isn't likely now, nor should one expect it to be a major player again any time soon.
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