Alcatel-Lucent – On the Selling Block? Verwaayen May Need To Consider It

Summary
Alcatel-Lucent has had a rough time in the global marketplace for the last few years. With China going full steam ahead, it is hard to see how Alcatel-Lucent will survive the next year or two without a miracle.
Analysis
I give Alcatel-Lucent credit for getting its house in order over the last 2 years. However, given the global recession, the company’s own weakened financial state since 2006, the merger integration troubles of combining two different telecom equipment vendors, and the 2010 component shortages, it is a miracle the company is still operating.

Alcatel-Lucent will need to find an acquirer unless at least one of the following occurs:

· The company has something unique in its portfolio to give it market dominance
· The company has some very large contracts in the process of being signed.
· The carrier community suddenly upgrades the network to deal with 4G. Lucent is focused on LTE.

Unless Alcatel-Lucent has something hidden away in its labs, which is so technically unique, it is doubtful the company will achieve market dominance through a brand new product or service. Developing ground-breaking technology costs money. Unless I have missed something, Alcatel-Lucent’s R&D budget is not that big. Maybe the company developed a new technology with almost no incremental costs in the company’s R&D budget. Get real. Strike this one from the list.

I have not heard of any carrier ready to sign a big contract (hundreds of millions of dollars; north of $500 M) with them in 2010 (now). Don’t even think 2011 for now. Most carrier sign general purchase agreements with vendors that include performance clauses. General purchase agreements do not guarantee anything from a carrier except that the carrier will buy something from the vendor; no guarantees on quantities either. Strike this one from the list.

I have not heard the carrier community launching any 2010 or early 2011 effort to upgrade their radio and fixed networks to deal with 4G wireless or other advanced wireless demands. The carriers have announced LTE trials and made claims of launching services in 2011 but that is different from actually doing it. The trouble with dealing with publicly traded companies is that half the time you do not know if the information is for the benefit of the stock price or it is the truth. Regardless of whether the carriers deploy LTE en masse in 2011 or not, the carriers (like Verizon) are on an irreversible path to deploy LTE. So whether it is late 2011 or 2012, LTE will be deployed at some point. However wild Ben Verwaayen’s comments about network upgrades may sound, they actually make sense and I agree with him.

By the end of 2010, wireless carriers will be taking steps to upgrade their networks to 4G. Do not expect billions of dollars of orders to come streaming through in 2010. What investors would like the vendors to say is: “We are having discussions with carriers about 4G network upgrades”, followed a few months later with “Carrier XYZ has just signed a billion dollar deal with us”. By late 2010, wireless carriers should be ordering and installing sufficient quantities of equipment to facilitate beta and commercial trials this year and early next year (2011). I do not believe any large-scale-commercial-ready LTE systems are going to be deployed until late 2011 or early 2012.

What investors need to hear from Verwaayen are specifics about deals. Even if the deals are not big, the information will be important for investors to hear to so that they can make intelligent decisions. What Verwaayen needs are patient investors. Patient investors may be the answer to Verwaayen’s concerns about surviving into 2012.

With increasing competition from Chinese telecom vendors, Alcatel-Lucent is facing an uphill battle to profitability. With Chinese vendors aggressively competing in the global market it is doubtful that Alcatel-Lucent’s small technology lead will matter. It is this aggressive competition from China that will prove to be Alcatel-Lucent’s (and all other vendors’) biggest obstacle.

Verwaayen is correct in stating there will be a need for network upgrades but it is likely the Chinese vendors will win a large number of the equipment contracts. Alcatel-Lucent is already facing stiff competition, which will get even worse this year. Should Alcatel-Lucent find a buyer now? Any competent CEO would be looking for a suitable buyer now; he/she would have to be considering the company’s options. From the looks of it, Ben Verwaayen understands his situation.

The questions I have are: Who would want Alcatel-Lucent? Who has the money to buy Alcatel-Lucent?