Alcatel-Lucent Starting To Implode? (ALU)

By Douglas McIntyre | March 27, 2007 AAA

On paper, the merger looked great. Two large telecom equipment markers with one based in Europe and the other in the US. Similar product lines and costs structures. On paper, you should be able to put them together and drive pricing up by taking two competitors and making them one. Cut costs in management, sales, and product development (To learn more about mergers and acquisitions, please see The Merger - What To Do When Companies Converge and The Basics Of Mergers And Acquisitions).

Nice Idea, Poor Execution.
A Goldman Sachs analyst recently wrote that Lucent-Alcatel's (NYSE: ALU) revenue is in "free fall". Apparently, the merged operation is so disjointed that sales are moving down in all divisions. The cutting of 12,500 people from the combined company's 79,000 combined person workforce is going ahead as planned, but, with falling revenue, it may not matter much.

It does not help that several other companies in the telecom equipment business have put out weak forecasts, particularly Motorola Inc.(NYSE: MOT) and Nortel (NYSE: NT).

Signs that everything might not be going according to plan emerged a month ago when the company announced earnings. Fourth quarter revenues dropped 15% compared to $5.74 billion from the same quarter a year ago. Operating income for the quarter also came down from $585 million to a loss of over $900 million. But, Alcatel-Lucent CEO's said that revenue would move up after a light first quarter. The company also promised that it would maintain its market share in the telecom equipment industry.

Telecom Was Supposed To Be Strong
Wall Street is faced with a vexing conundrum. Telecom infrastructure spending was supposed to go up as fiber optic installations were put in the place of cooper to improve broadband speeds. This trend should be helping Alcatel-Lucent. Ditto the upgrades by cellular services to 3G with the likes of Verizon (NYSE: VZ) putting hundreds of millions of dollars into their wireless networks. But yet... Alcatel-Lucent's situation doesn't appear to reflect this supposed trend.

What Happened To the Idea That Scale Matters?
The merger of Lucent and Alcatel did indeed create the world's largest telecom equipment maker. This should be a partnership made in heaven since Alcatel had a strong wire line access equipment business and Lucent had a stronghold in wireless; The companies did not have huge amounts of overlapping revenue.

In bidding for business from giant telecom companies like Deutsche Telekom (NYSE: DT) and AT&T (NYSE: T), having "one stop shopping" and the ability to work through an international sales force would be essential. Lucent-Alcatel should be structured to offer those services/features.

Execution Risk
Figuring out how things should go is obviously not the same as having everything go as planned. Despite how the world has been already set up in its favor, it appears that the management of Alcatel-Lucent simply dropped the ball at the critical part of the game and has not fully capitalized on the benefits of the merger as fast as the market had anticipated.

The market clearly does not believe that the company will recover anytime in the near future. Even the inclusion regarding the news from the other day that Alcatel-Lucent will be receiving a $6 billion contract from Verizon did not create any significant price appreciation in its stock price. All in all, the stock has dropped from almost $15.25 in January to under $12.00 recently.

The management problems at Alcatel-Lucent create one other issue that may trouble the company for many quarters. It has given competitors like Motorola, Ericsson (Nasdaq: ERIC), and Nortel the ability to grab business while the newly merged company fixes internal problems.

For want of a nail, the kingdom was lost.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

comments powered by Disqus
Related Analysis
  1. India Remains An Emerging Market Bright Spot
    Stock Analysis

    India Remains An Emerging Market Bright Spot

  2. Still More Gains Ahead For Semiconductor Makers
    Stock Analysis

    Still More Gains Ahead For Semiconductor Makers

  3. In Telecom, Wireless Still the Key - Industry Outlook
    Stock Analysis

    In Telecom, Wireless Still the Key - Industry Outlook

  4. The $1,382 Per Month Dividend Strategy
    Investing

    The $1,382 Per Month Dividend Strategy

  5. Price Wars May Decimate This Industry—And Its Top Player Is Most Vulnerable
    Investing

    Price Wars May Decimate This Industry—And Its Top Player Is Most Vulnerable

Trading Center