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Alcatel Lucent SA (ADR) (ALU) Revival Plan: Should You Jump In?

Alcatel Lucent SA (ADR) (NYSE:ALU)’s newly appointed CEO, Michel Combes, recently announced plans to cut costs. Combes said he aims to raise 2 billion euros ($2.7 billion) by 2015 through job cuts and asset sales.

After Combes joined the French-American telecom networking equipment maker in April, he has been trying to refocus the company on strengthening its position in the wireless broadband equipment business. Alcatel Lucent SA (ADR) (NYSE:ALU) already has one of the most valuable patent portfolios in the world.

Alcatel Lucent SA (ADR) (NYSE:ALU)

Though shareholders have been optimistic about his plans, there is a lot of uncertainty as the company has already lost much of its market share to competitors. Combes’ predecessor, Ben Verwaayen, had also announced massive restructuring plans and job cuts between 2010 and 2012. However, Verwaayen failed miserably to stop sales declines and generate profits.

Michel Combes is the right man for the job

I believe Michel Combes has all the necessary capabilities to revive the company. He has a history of massive cost reduction. With more than 20 years of experience in the telecom industry, Combes successfully led a 2 billion pound ($3 billion) cost cutting program at Vodafone Group Plc (ADR) (NASDAQ:VOD). He reduced expenditures on network gear and logistics, and slashed headcount at the British firm. He also changed pricing strategies across Europe, the biggest market for Vodafone Group Plc (ADR) (NASDAQ:VOD), tying data tariffs to consumption. Combes has also overseen finances at France Telecom.

Anybody who thinks Alcatel Lucent SA (ADR) (NYSE:ALU) can’t make a comeback should think of Ericsson (ADR) (NASDAQ:ERIC). The Swedish company was also on the verge of collapse about 11 years ago. But rather than giving up, Ericsson (ADR) (NASDAQ:ERIC) refocused itself on its mobile equipment business. It had to slash more than 50,000 jobs worldwide, that was about half of its total workforce. Meanwhile, low cost Chinese equipment makers like Huawei Technologies and ZTE were eating into its business. It took Ericsson more than four years to halve its workforce and regain the lost business. Today, Ericsson is the world’s largest wireless networking equipment maker.

Not without challenges

Alcatel Lucent SA (ADR) (NYSE:ALU) is grappling with a number of challenges. The biggest challenges are excessive workforce and over-diversification of its business. Let’s look at the workforce problem first. According to Bloomberg, the company’s quarterly revenue per employee is 49,700 euros ($63,600,) compared to 58,280 euros for Ericsson and 57,770 for Nokia Siemens Networks (NSN.) It means the French-American company employs more workers to generate revenues.

To match the sales per employee (or productivity) of its major competitors, Alcatel Lucent SA (ADR) (NYSE:ALU) has to cut its workforce from about 72,000 worldwide to less than 62,500. It has to cut the headcount and make its employees more productive.

Alcatel Lucent SA (ADR) (NYSE:ALU)’s product portfolio is massively diversified: wireless (CDMA), network division (Optics and IP), wireline (broadband), enterprise segment, and software services segment. Yes, I admit that diversification can be a good strategy, but over-diversification has taken its toll on the company so far.

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