Is Alcatel-Lucent The Next Nortel (or Motorola)?

Is Alcatel-Lucent going to the way of Nortel (i.e. bankruptcy) or Motorola (i.e. breakup)?  It is likely that Ben Verwaayen and the Alcatel-Lucent Board of Directors are certainly thinking about this as they prepare to share more details about the restructuring plan initially announced on July 26th of this year.  These details are likely to be shared with the financial community when the company reports its 3Q results on November 2nd or sometime soon thereafter.

Alcatel-Lucent and Nortel (and to some degree Motorola) were legacy telecom equipment suppliers that suffered from three issues since the 2000 tech bubble collapse:

1)   The market entry and vast success of China based Huawei with its significantly lower cost business model

2)   Service provider consolidation, which dramatically reduced the number of customers and created a smaller group of much larger customers (e.g. Verizon = NYNEX, Bell Atlantic, GTE, MCI, WorldCom, UUNET, Alltel etc.….)

3)   Pension obligations, which further impacted their cost structure vs. newer competitors that did not have this overhead

For Alcatel-Lucent to avoid being the next Nortel, and salvaging some value for shareholders and likely more jobs for current employees longer term, I believe the proper course for the company should be to break itself up like Motorola did rather than risk a bankruptcy process to lead to such a break-up.  While there are many outcomes for such a break-up, we believe the best choice for the Company is as follows:

1) Sell Mobility and Mobile Patents to Samsung or Cisco:  While the trend towards Mobility is a convincing reason for Alcatel-Lucent to stay in the wireless infrastructure business, the company does not have enough scale vs. other businesses like IP Routing and Optical.  The rapid decline of legacy high margin CDMA technology also makes the wireless business likely loss making now and into the future.  Given US security concerns as evidenced by the recent US review of Huawei and ZTE, I believe this business could only be sold to a “Western friendly” company. Samsung makes the most sense given its already in the wireless infrastructure business (but lacks scale), has strong financials, can complement its strong mobile handset business and would welcome additional intellectual property in its ongoing patent war with Apple.  While Cisco is a longer shot given its lack of historical desire to be supplier of base stations (although it did try and fail to enter the WiMax market via an acquisition in the past), its ability to garner more presence with leading global services providers could make such a transaction somewhat enticing.    Hey, if Cisco acquired Scientific-Atlanta, why not think about them considering the Alcatel-Lucent wireless business if it went up for sale?

2) Double Down On IP Routing and Optical:  Where Alcatel-Lucent has scale, competitive technology and better prospects for profitability in my view is in the IP Router and Optical Systems market.  The company is number two globally in edge IP Routers and in the top two in Optical Systems.   The ongoing convergence of IP and Optical also provides unique competitive positioning.  While the company does have global scale in the Broadband Access market, there is little or no growth in this business going forward.  The company should likely stay in the business with a transition to more of a services/OEM model by utilizing more focused vendors in this market for future upgrades of the installed base.

3) Jettison the Enterprise Business: The Alcatel-Lucent Enterprise business is competitively in a weak position with little if any product leadership and lack of scale.  According to the company’s financial reports, the business is still generating a small profit.  I believe divesting this business and letting it fend for itself is the best outcome given it has little synergies with the service provider business and creates little or no value within the overall company.  Its not clear the Enterprise business would compete effectively as a stand alone company, but given management was not able to find a buyer for the unit over the past several years at any price, there is nothing to lose letting it go its own way.

Well those are my thoughts, lets see what Ben and team decide to do.