The new plan may sound like more of the same at Alcatel Lucent SA (ADR) (NYSE:ALU) since the last chief also had a restructuring plan. However, the execution of that plan was minimal and left much to be desired even as laid out on paper. Not enough jobs were cut and in my opinion, not enough parts of the company were on the chopping block. The company’s market cap is very little compared to its revenue, and I think those two numbers will need to meet somewhere around the middle.
Trimming more than fat
High up on the list of units that need to be jettisoned is the profitable submarine cable business. If you had the same history textbook as I did in high school, you saw the old engraving or woodcut of telegraph cables being placed in the ocean between the U.K. and the U.S. Cables are still the most superior form of data transmission, despite the leaps made in wireless. The breakthroughs made with cables are left out of the public consciousness, because they seem mundane. The cable business has low margins. Getting rid of low margin businesses is generally what you do to boost returns once you are turning a profit, but Alcatel-Lucent can use all the cash it can get.
Another piece of good news is that the head count is to be reduced further. Alcatel Lucent SA (ADR) (NYSE:ALU) has far too many people working for it considering the losses it has been posting. All this unit ejecting, head cutting, and expense chopping has some people concerned about Alcatel Lucent SA (ADR) (NYSE:ALU)’s ability to compete.
Expense cutting does not mean a lack of growth
Competition with the likes of Cisco Systems, Inc. (NASDAQ:CSCO) and Juniper Networks, Inc. (NYSE:JNPR) requires money to be spent. Alcatel-Lucent is in a lot of businesses and not all of them deserve attention. The company needs to efficiently spend money, and it will likely increase spending where necessary to remain competitive in its core businesses or more importantly, the ones with the greatest potential.
The company did not bring its new core router to market just to have it become obsolete inside of a year. The company has at least indicated that it will be preparing for SDN like Cisco Systems, Inc. (NASDAQ:CSCO) and Juniper Networks, Inc. (NYSE:JNPR). I do not think there is any benefit in painting the company as a fool. Winning market share, developing new products, and breaking into new markets takes far more time than Alcatel-Lucent has if it does not drastically cut expenses. In order to aggressively expand its business, it first needs to make money.
Alcatel Lucent SA (ADR) (NYSE:ALU), like most companies, has money pits throughout the company that yield no benefits in the long-term. If the company has to lose $4 billion in revenue in order to save $6 billion, that is a good deal. Also, if it divests assets then it will have cash. Not all of it needs to go toward paying off debt, and the company is raising even more money to keep debt at bay by issuing convertible bonds. Some cash can go towards staying competitive and technologically advanced.
Efficient use of capital is the key to growing while cutting expenses. Other companies manage to do it, though growth might stall a bit. I would be looking for certain parts of Alcatel Lucent SA (ADR) (NYSE:ALU) to continue doing well, and the others to be quietly dropped.
I used to think leveraging the patent portfolio was a great way for the company to generate cash, but I do not think that will be effective anymore. There are still some out there that feel the company is not doing enough with its portfolio. The framework Alcatel Lucent SA (ADR) (NYSE:ALU) set up meant that the patents would be available to a very small group of companies. I also do not want to see it wasting too much effort on the patents, because it is a short-term fix at best, and that effort is better spent finding places to save on recurring costs.