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On April 1st, Michel Combes took over as the new CEO of Alcatel-Lucent (NYSE:ALU). My advice to Mr. Combes is ALU needs to focus on less businesses to stop the negative free cash flow that has plagued the company since ALU was created in December of 2006 through the merger of Alcatel and Lucent. In particular, I believe ALU should sell its mobile infrastructure business, with either Samsung or Nokia-Siemens Networks as potential interested buyers, divest its Enterprise business and remain focused on the remaining businesses where the company has more scale and technology leadership, namely, IP Routing, Optics and broadband access. The severity of the financial situation at ALU was evident when the company had to use its patent portfolio and other assets as collateral for the $2.1 billion debt financing the company secured in December of 2012. The ongoing cash burn at the company and the somewhat desperate measures needed to secure the debt financing were probably factors that played into the former CEO Ben Verwaayen having to step down on April 1st.

Strategically, ALU has suffered from staying in virtually all aspects of the Telecommunications Equipment market, namely, Enterprise, Wireless, Optical, Access, IP Routing etc. even though the company has only competitive market share and scale in a few of these businesses. The goal and hope was that being a full service equipment supplier across all the segments of the telecommunications market, would provide cost and cross-selling synergies. While there may have been some merit to this strategy, intense competition from new Chinese suppliers Huawei and ZTE and a consolidation trend among the telecommunication service provider customers over the past several years has made this strategy no longer viable.

In particular, ALU has only competitive market share in Optical, Broadband Access and IP Routing among all its major businesses. In addition, the technologies of IP Routing and Optical are converging somewhat and ALU is the only global supplier that is strong in both segments. ALU does currently suffer from poor profitability in its Optical business, however, there is some hope in the future that profitability in the business may improve as the company sells a common platform for 100G functionality rather than the multiple platforms it sold in 10G technology.

While it is likely a difficult decision for ALU to sell its Mobile Infrastructure business, the company does not have scale nor profitability in this business once the legacy CDMA technology is removed from the analysis. ALU is fourth globally in the Mobile Infrastructure business behind Ericsson (NASDAQ:ERIC), Huawei and Nokia-Siemens Networks (NYSE:NOK) and it is unlikely to break into the top three in my view. Selling this business and being more focused in areas where the company does have scale, I believe is the better path for success. In fact, competitor Nokia-Siemens Networks has demonstrated that focus on fewer businesses with scale can be a path to profitability and cash flow generation. Over the past 18 months, Nokia-Siemens Networks has exited virtually all of its wireline business (e.g. Optical and Broadband Access) and has become focused on its wireless and services businesses. As a result of this transformation, the company is now generating profits and positive cash flow.

It will be interesting to see what Michel Combes and the ALU board of directors decide to do in the future. My advice is to follow the NSN example and focus on fewer areas where the company has scale and can lead technologically.

In terms of the stock, I am not currently invested in ALU shares. I will be watching the strategic direction that Michel Combes sets for the company as an important milestone. In addition, it is likely ALU may have a challenging first quarter given the slow start in telecom spending that appears to have occurred in 2013. Thus, it might be best for investors to let 1Q13 results get out of the way before looking to go long this stock in my view.

Source: Advice For The New CEO Of Alcatel-Lucent

Additional disclosure: NT Advisors LLC is a consulting firm for the technology, private equity and venture capital industries.