Alcatel-Lucent Secures €1.6B Lifeline
The cash pool will help fund the vendor's recently announced restructuring plans, dubbed the Performance Program, which involves cutting about 5,500 jobs and focusing on certain markets and product lines. (See Alcatel-Lucent Unveils Revamp, Alcatel-Lucent Sharpens Its Focus, AlcaLu Job Cuts to Hit 5,500 and Pressure's On in Paris.)
CEO Ben Verwaayen expects the Performance Program to cut annual costs by €1.25 billion ($1.64 billion) by the end of 2013, but, in the short term, implementing that program is going to eat up a lot of cash.
Now that the company has access to more immediate financial reserves, investors appear to feel happier that Verwaayen and his team can rebuild the vendor and become operationally profitable again. Alcatel-Lucent's share price was up by 10 percent to €0.94 on the Paris exchange early Friday morning, though that still only gives the company a market capitalization of €2.17 billion ($2.84 billion).
Naturally, the CEO is painting a positive picture following the credit agreements. "We will take advantage of the flexibility provided by this new financing in order to aggressively look at all options to drive long-term sustainable profitability, enhance our strategic positioning and improve our balance sheet," stated Verwaayen in the company's official statement.
The credit facilities are due to be secured by "among other things, the intellectual property portfolio of Alcatel-Lucent," the company noted. The vendor has identified its patent pool as an asset that can generate cash flow and has been attempting to find a way to cash in on its intellectual property during the past year. (See AlcaLu CEO 'Not Selling the Family Silver'.)
In an effort to maximize its patent value potential, Alcatel-Lucent recently created a dedicated Intellectual Property business unit headed up by experienced lawyer Craig Thompson. (See Euronews: AlcaLu Looks to Profit from Patents.)
Alcatel-Lucent remains confident that it can improve its fortunes during the next few years. In announcing the credit facilities, the vendor noted that it had provided its lenders financial forecasts that include a 2015 gross margin target between 35 percent and 37 percent and an adjusted operating margin between 6 percent and 9 percent, significantly better than the 27.9 percent gross margin and adjusted operating loss the vendor managed in the third quarter of this year. (See Margin Misery for Alcatel-Lucent.)
Some financial analysts are skeptical that AlcaLu can achieve its targets. See this Reuters article for commentary that questions the credibility of the vendor's forecasts.
Why this matters
While this is an important step for the company, it's still only one brick in a very large wall that Verwaayen has to build if AlcaLu is to be one of the communications systems sector's survivors and not, as some in the industry have suggested, become "the next Nortel." (See The Decline & Fall of Nortel Networks.)
The CEO needs to quickly determine which assets are worth retaining, which markets it can afford to exit and whether the company's human resources are compatible with the market AlcaLu will be targeting in the coming years.
He also needs to sort out once and for all how the vendor is going to manage its patent portfolio. During the past year the management has been talking up the value of the vendor's intellectual property but has so far failed to identify the optimum strategy for realizing its potential value. Now Verwaayen, CFO Paul Tufano and new recruit Thompson need to put a workable plan into action (and fast) to help ensure the company's viability and reputation.
AlcaLu needed to do all that anyway, but the new credit lines at least give it access to some of the cash needed to put any plans into action.
If Verwaayen acts quickly and decisively, the company could realize some tangible gains within the next year, if the experience of Nokia Networks is anything to go by. NSN secured fresh funding to bankroll the major restructuring program it announced in late 2011 and now appears to be improving its margins and gaining market share in its target sectors. (See NSN Boasts LTE Market Share, NSN Boasts RAN Market Share Growth, APAC Boosts NSN's Q3, Analysts: NSN Focus Makes Sense and NSN Gets $1.36B & New Leader.)
However, NSN's cuts have been deeper than those proposed by AlcaLu, and it's quite possible Verwaayen will either have to announce further cost reduction actions if he is to get anywhere near the financial targets provide to the lenders. (See NSN Could Lose More Than 17,000 Staff and Alcatel-Lucent: Too Little, Too Late?)
— Ray Le Maistre, International Managing Editor, Light Reading