To say that Alcatel-Lucent (NYSE:ALU) is in serious trouble is to say that water is wet, as these shares have seen a bumpy ride down from the tech bubble peaks in 2000. Despite a lucrative patent estate and solid technology, the company has struggled to translate its intellectual property into successful products and has largely failed to compete effectively with other telco equipment rivals like Cisco (Nasdaq:CSCO), Juniper (Nasdaq:JNPR), Huawei and ZTE (OTC:ZTCOY). Now with rumors flying that the company is considering using its patent portfolio to secure financing, it's worth asking if Alcatel-Lucent is down to its final cards to play in its ongoing effort to turn around.
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Liquidity Vs. Confidence
Although a quick look at the most recent balance sheet from Alcatel-Lucent doesn't necessarily scream out that there's a near-term liquidity crisis, the market feels differently. The company has close to $3 billion of debt coming due over the next three years, and there's currently a significant dearth of confidence that management can cut costs and shore up cash flow enough to successfully roll over or refinance that debt. Consequently, the company's credit default swaps spent most of the summer and fall at very elevated levels.
Even if the numbers argue that the panic is misplaced, the company needs to do something. At a minimum, large service provider customers are reticent to do business with suppliers that they believe are in weak financial shape.
Pawning the Family Silver?
This is where Alcatel-Lucent's patent estate comes into the picture.
Apparently the company is looking to raise at least $1 billion in financing and is willing to put up its patents (or at least a portion of them) as collateral for the loan. While asset-backed lending is not uncommon in sectors like airlines, it's much less common in technology. Nevertheless, with the company's revenue forecasted to decline by a mid-teens percentage this year, it may be the company's best marketable asset.
When a consortium of bidders ((including Apple (Nasdaq:AAPL), Microsoft (Nasdaq:MSFT) and Sony (NYSE:SNE)) ponied up $4.5 billion for 6,000 of Nortel's patents, eyes opened up again as to the potential value of Alcatel-Lucent's patent estate. The estimated value of patents is even hazier than that of publicly-traded companies, but there seem to be plenty of analysts and industry insiders willing to speculate that the company's 30,000 patents could be worth 50 to 100% more than Nortel's were - implying about $2 to $2.50 a share in value.
While it's still early (and most of the discussion so far is just rumor-mongering), apparently Goldman Sachs (NYSE:GS) is willing to at least discuss accepting the patents as collateral. At the same time, the company is reportedly also considering using its fast-growing routing business as collateral (likely instead of, not in addition to, the patents). It certainly makes sense to monetize/mortgage assets to stay in business if management really believes they have a cogent turnaround strategy, but it remains to be seen how shareholders and debt holders will react to seeing the company put such a valuable asset on the table in order to continue playing.
The Bottom Line
This isn't the first time that Alcatel-Lucent's patents have been highlighted as an under-appreciated asset in the company's portfolio. Unfortunately, it's not clear to me that mortgaging these assets really adds to the long-term value of the company. As I said before, Alcatel-Lucent has an unimpressive record over the past decade of translating its intellectual property into market-leading products, and I have significant doubts that the company's management can effectively cut costs and still maintain such a broad and diverse set of businesses.
In short, I believe Alcatel-Lucent, as presently constructed, is unlikely to generate economic returns for shareholders. As such, I believe investors would be better served if Alcatel-Lucent would break up the business and essentially sell it for parts. While I'm sure bulls will disagree strongly on this point, it is my position that the company's management is more likely than not to continue to destroy value and that the best option today is to try to get top dollar for all of the company's assets.
At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.