Alcatel-Lucent (ALU) provides networking and communications technology, products, and services to service providers, enterprises, and governments worldwide. Its Networks segment designs routers, multi-service wide-area-network switches, and content delivery network appliances. In addition, the company manufactures and markets microwave wireless transmission and optical networking equipment and wireless products for 2G, 3G, and 4G networks.
Alcatel-Lucent's software, Services and Solutions segment provides consulting, planning, design integration and optimization, as well as in the design, delivery, and operation of network-based software solutions. ALU's stock had a mixed year; the stock started rising after the company was able to raise funds at the end of the last year. However, fourth-quarter and full-year results had negative impact on the price and the stock again came down. There have been a lot of changes at the company, which may prove to be important for the company in the long term. Alcatel-Lucent will have a new CEO by the start of April, who is expected to turn the company around. Furthermore, the company may go through another merger for consolidation in the industry. Let's look at how these events can affect the company in the long term as well as short term.
Will Michel Combes Be Able to Turn the Company Around?
Ben Verwaayen decided to step down as CEO after he failed to stop the downfall of the company. Alcatel-Lucent has appointed Michel Combes as Ben Verwaayen's replacement. Michel Combes has extensive experience in the telecom industry. Previously, he has worked with France Telecom SA (FTE) and Vodafone Group Plc (NASDAQ:VOD). The biggest challenge for Combes will be to reduce the costs and bring back the company to profitability. Alcatel-Lucent announced restructuring plans; however, the company has not been aggressive in its efforts to cut down costs.
Combes carried out an identical project successfully at Vodafone while he was the head of Vodafone Europe. He carried out a $3 billion cost saving program through job cuts and reducing expenses on network gear and logistics. Another challenge for Combes will be to utilize Alcatel-Lucent's R&D department to its best. The company has one of the best R&D departments in the industry. It will be interesting to see how Combes uses the R&D department. Combes has the ability to succeed at the job as the guy has drive and energy to do well. He increased Vodafone's enterprise and data business in Europe. Combes has the reputation of working long hours. Turning Alcatel-Lucent around will be an extremely challenging job for Combes; however, with proper support, he has the capability of steering this ship out of trouble.
Consolidation in the Industry
Alcatel-Lucent faces intense competition in Europe from Nokia Siemens and Siemens AG (SI), and in Asia, the company faces tough competition from Huawei Technologies and ZTE Corp. As a result of intense competition, revenues are falling. Alcatel-Lucent is getting pushed from both revenue and cost sides. There is a chance that companies in the industry are looking at consolidating. It is unlikely that Ericsson will look to any merger or acquisition as the CEO of the company said he would rather spend the money on R&D, though he did not categorically reject the idea of a merger, chances of it happening are slim.
On the other hand, Nokia Siemens is looking at a merger with one of the two other major players in the European market. It is rumored that Nokia Siemens have held exploratory talks with Alcatel-Lucent. A merger might be a good idea for Alcatel-Lucent at the moment. There will be one less competitor and two companies can combine their expertise to better cope the challenges in the market. However, it is always difficult to integrate and achieve total synergies. The last merger Alcatel-Lucent went through has not proved to be a success. Furthermore, the French government is also looking at the possibility of investing in the company in order to protect the patent portfolio. However, it might just be an attempt by the government to stop the company from cutting jobs. If these fears realize, it might be impossible for the new CEO to turn the company around.
Alcatel-Lucent desperately needs to cut costs and increase revenue. The company cannot carry on in the current condition for long. I believe Combes has the ability to successfully carry out his strategies if given time and proper support. The competition is intense in the market; however, due to increasing demand for data services and networking equipment, there is also attractive opportunity available. Alcatel-Lucent shareholders will have to be patient and see what the new leadership has in mind. If Combes is able to present a clear plan and implements it successfully; Alcatel-Lucent might reach its previous heights.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.