Alcatel-Lucent: Too Little, Too Late?
Thursday July 26 2012 was a significant day for Alcatel-Lucent (NYSE: ALU). The company admitted that its efforts to become a profitable, stable company weren't working and that it needed to shrink its workforce by about 6 percent, get out of non-profitable managed services deals and find a new way to persuade the market, and itself, that the future will be brighter.
- Alcatel-Lucent to Cut 5,000 Jobs
- Alcatel-Lucent Could Exit 25% of Services Deals
- Pressure's On in Paris
But is it going far enough? Clearly some think not.
Investors aren't convinced by the plans, as the vendor's share price is down, if only by a fraction of a cent, to €0.82 on the Paris exchange, where it has lost nearly 36 percent of its value in the past month alone.
The story is the same on the other side of the Atlantic, where the stock is down 3 cents to $1.00, giving Alcatel-Lucent a market value of US$2.34 billion.
Long-time telecom sector financial analyst Mike Genovese, a managing director at MKM Partners , believes the "significant job cuts and slight restructuring are probably not enough with €2.7 billion [$3.33 billion] in debt due from 2014-2017."
IP Equipment Spinoff?
So what else could AlcaLu do? In a research note, Genovese states that a spin-out of the IP (routers) division "could create value." Taking the market value of rival IP equipment vendor Juniper Networks Inc. (NYSE: JNPR) as a guide, Genovese notes that the IP equipment business, which is generating about €2 billion ($2.46 billion) in annual revenues, could be worth more by itself than the whole of its parent currently.
That assessment would place a zero, or even negative, value on the remainder of AlcaLu's operations at current market capitalization values.
In fact, Mark Sue at RBC Capital Markets has, in a research note issued Friday, cut the target price of AlcaLu's stock to $0.00 (honest!), stating that "we believe the company may see revenues contract, experience profits reductions and continue to burn cash from operations … the IP segment remains the only strong card in the Alcatel-Lucent portfolio," adds Sue.
As Light Reading noted Thursday, the IP division is the company's only real shining star currently. In addition, it has a highly respected leader in Basil Alwan and highly respected products. (See IP Remains Alcatel-Lucent's Star Performer.)
But what impact would a spin-out of that line of business have on the parent? It might end up being the company's only option, but what would that mean for the rest of the company? A slow and costly demise, very possibly.
Of course, AlcaLu's CEO Ben Verwaayen doesn't see things the same way. He is bullish about the company's ongoing prospects in China, where the current contract award hiatus is expected (by Verwaayen, at least) to be followed by a new wave of capital spending that will benefit AlcaLu. LTE, 100Gbit/s optical and cloud services management are also regarded as significant growth areas by the company's management.
What will be worrying for many, though, is that AlcaLu's current predicament looks similar, though not identical, to that of Nortel. If Verwaayen and his team can turn the AlcaLu ship around and prove analysts such as Mark Sue wrong, then it'll become a textbook case of a remarkable transformation.
If the management team doesn't achieve its goals, though, it might just become a textbook example of what can go wrong for large joint-venture companies in a fast-moving technology vertical.
— Ray Le Maistre, International Managing Editor, Light Reading