By Richard Saintvilus
I was recently asked for my opinion on beleaguered telecom giant Alcatel-Lucent (ALU). As you can imagine, with shares trading at $1.34 there's quite a bit of interest given that investors are using terms like "two-baggers" and "four-baggers." People want to know if the stock can double in value. Can it happen? Sure. But will it? That's a different story entirely.
Will it be different this time?
You see, this level of optimism is not new. There was also lot of hope when the two well-respected telecom equipment vendors (Alcatel and Lucent Technologies) merged. Instead, the combined businesses have struggled to compete against more agile rivals like Acme Packet (APKT), which was just acquired by Oracle (ORCL), and better managed names like CIENA (CIEN).
Nevertheless, things are beginning to pick up for ALU. Granted, it's been six years after the two giants merged. But even though it is not fully reflected in the stock price, there are now meaningful signs of progress. ALU seems poised to capitalize on its solid market share and harvest that position into shareholder value.
Restoring shareholder value should be the main objective of new CEO, Michel Combes, who took over on April 1. This could be accomplished in a couple of ways. However, the immediate route would be through an acquisition. And I think that is more likely the outcome.
Let the battles begin
Before you disagree, consider this. When Oracle picked-off Acme packet two months ago, nobody saw this coming, either. The deal, which is expected to close in the first half of this year, is valued at $29.25 per share for Acme Packet, or roughly $1.7 billion. But when including Acme Packet's assets such as cash, cash equivalents and other investments, Oracle is spending $2.1 billion.
This is a deal Oracle needed to make to shore up its one-stop-shop enterprise business, where Oracle competes with (among others) Cisco (CSCO). What's more, even though buying Acme Packet came shortly after Oracle's $810 million acquisition of cloud specialist Eloqua, there are signs that Oracle is not done spending. Am I suggesting that Oracle should now buy ALU? No. But someone will. And my guess is that Cisco or Microsoft (MSFT) will close the deal.
Here's why Cisco should do it; many investors still underestimate that ALU's IP and optics business is trending higher. Plus, the company's newest routing platform already competes with similar Cisco models - and in some cases, ALU's hardware is considered better. Likewise, ALU has an impressive CloudBand strategy that rivals some of the more prominent names in the industry, even Cisco.
I don't think Cisco can ignore the synergies presented here. Besides, Cisco's recent acquisitions, which includes paying $141 million in cash for Cariden and another $1.2 billion for Meraki suggests that the company will leave no stones unturned to produce growth.
Plus, with the cloud market expected to grow to $177 billion over the next two years, it would be foolish for Cisco to allow ALU to get acquired by a rival company, especially since ALU, which has a market cap of $3 billion, would only cost Cisco (maybe) 6% to 8% of its cash, which currently sits at $46 billion.
Meanwhile, Oracle can't be ruled out, either. Oracle, which has $33 billion in cash, can certainly buy ALU to leverage its current position in Acme Packet. If nothing else, Oracle should buy ALU to keep Microsoft, with whom Oracle competes, from strengthening Microsoft's own cloud/hardware position.
Microsoft, which has struggled outside of Windows and Office, should see the growth opportunities that Oracle now has with Acme Packet, which has new technologies such as the Net-Net 6300, which has the ability to provide high-capacity network interconnect between service providers should help the company steal market share from even Cisco.
In other words, Oracle's enterprise position is now looking much stronger than Microsoft's. To that end, I don't think that Microsoft can afford to sit idle and not consider ALU, not if Microsoft is really serious about its cloud and enterprise position.
Here's making sense
While I do like ALU's progress, it's hard to see this company ever gaining enough market share to produce the sort of returns that investors expect. While I don't believe ALU's market position will improve significantly, at least the company's financial position is looking much better.
Plus, this also makes ALU more of an attractive acquisition candidate to Cisco and Microsoft. With the stock trading at $1.34, can it double? I'm not going to hold my breath - not for this year, anyways. There are plenty of significant margin improvements that needs to occur first.
That said, the stock did reach $1.79 on January 25. If ALU can regain that premium, while new leadership improves operations, the stock would only be 50% away from a double at $1.34. Can this happen? Yes. But will it? This is what Cisco, Microsoft and Oracle have to be wondering about. Would they allow ALU to get too expensive?
Additional disclosure: SaintsSense is a team of financial writers. This article was written by Richard Saintvilus, founder of SaintsSense. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.