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Alcatel-Lucent, the embattled network equipment maker that has struggled financially since its creation in 2006, is set to undergo another companywide restructuring that is getting a cautious reception from analysts.
Alcatel-Lucent is calling its latest effort the “Shift Plan,” a move to transform the company from a more general telecommunications equipment vendor to a specialist focusing on IP networking and ultra-broadband access, both areas that show high growth due to the growing demand from cloud and Internet providers for high-speed networks.
The Shift Plan is expected to save the company about $1.3 billion in expenses and generate another $1.3 billion by selling various assets over the next two years. In addition, Alcatel-Lucent will spend as much as 85 percent of its R&D money on IP networking and ultra-broadband access efforts by 2015. The Shift Plan also would mean more job cuts for the company, which currently employees about 72,000.
The initiative comes a little more than two months after Michel Combes took over as CEO of the company, following the resignation of Ben Verwaayen after four unsuccessful years trying to cut costs and stabilize the company.
Analysts said that any plan by the company to reduce the number of its businesses makes sense. However, some are wary of yet another big corporate move by Alcatel-Lucent, and question how quickly the company will be able to exit some of its other businesses. In the meantime, Alcatel-Lucent—like other European networking equipment providers (NEPs) such as Ericsson and Nokia Siemens Networks—faces increasing pressure from competitors from Asia, particularly Huawei Technologies and ZTE.
“Alcatel-Lucent’s strategy change shows just how fast market dynamics have changed in a market once dominated by the large Tier-1 telecommunication providers that are its customers, but increasingly under siege by Internet content providers, and by NEPs based in the West that have been out-competed by Chinese vendors, most notably Huawei, and by specialists,” Ron Kline, principal network infrastructure analyst at Ovum, said in a research note. “The move will allow Alcatel-Lucent to focus on cloud and large-scale Internet providers that are generating a growing portion of bandwidth demand.”
Where the company may be challenged is finding buyers for its legacy businesses, such as its, optical networking unit, Data Communication Structure products and SONET/SDH media dependent adapters, Kline wrote. In addition, there could be regulatory barriers to selling its Submarine Network Solutions unit, he said.
“Given the extent of the installed base of legacy products and the relevant customers, accelerating an exit could prove difficult,” he wrote. “Alacatel-Lucent faced a similar dilemma when it rationalized its products back in 2006 after the merger [between Alcatel and Lucent]. However, customer protests made the company reverse its decision.”
Alcatel-Lucent Officials Push Newest Restructuring Plan
Jefferies Group analysts George Notter and James Kisner in a research note supported Alcatel-Lucent’s efforts to pare the number of businesses, but said they were taking a wait-and-see approach to how well the latest turnaround efforts go.
“We’re reminded that Alcatel-Lucent has been a perpetual restructurer,” Notter and Kisner said, according to a report in Bloomberg. “It’s hard to really see why this latest restructuring will get executed according to plan and yield the benefits that have been outlined here.”
Alcatel-Lucent has struggled to get its financial footing since the merger. The company’s first profitable year came in 2011, but that didn’t continue in 2012. According to numbers released in February, Alcatel-Lucent lost $1.81 billion in the fourth quarter of 2012, with revenues falling by 1.3 percent.
Officials had hoped the merger would create a networking giant that could rival the likes of Cisco Systems and Ericsson, but instead it created a massive, unwieldy company is many product lines. The merger also occurred just before the global recession hit, forcing enterprises, telecommunications firms and service providers to pull back on their IT spending.
During Verwaayen’s tenure, the company went through a number of initiatives to turn the company around, most recently with officials in the summer of 2012 announcing that they were cutting another 5,000 jobs as part of a larger plan to slash $1.5 billion in costs by the end of 2013.
New CEO Combes said his plan gives the company greater focus.
“The Shift Plan redefines Alcatel-Lucent’s industrial identity and clarifies its role in the technology ecosystem,” he said in a statement. “The goal is now set, and we can focus, with all the Alcatel-Lucent employees, on its delivery and on finally fulfilling the company’s potential to create substantial and enduring industrial, social and financial value for all stakeholders.”