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Alcatel-Lucent's Cost-Cutting Strategy Will Fail

Stocks in this article: ALU CIEN CSCO ORCL

If management is serious about harvesting value, there needs to be a better balance between growth and fiscal awareness. For that matter, I believe that rivals including Acme Packet, which is now owned by Oracle (ORCL), are cheering ALU's 6% and 12% decline in operating expenses and sales and general administrative expenses, respectively.

For Oracle and Acme Packet, cost cutting by ALU plays right into their hands because they understand they don't have to spend extra to grow their businesses to compete.

There's also another angle here. I've been at this long enough to appreciate when a company is trying to make itself appear more attractive to potential suitors. Here, too, Acme Packet, prior to being bought by Oracle, was a perfect example.

Given Alcatel-Lucent's strong technology and a lucrative patent estate, I'm not going to rule out the possibility the company is being courted, which is why the books have become so important.

In fact, back in February I outlined a scenario where I felt that Cisco should buy the company. I'm not backing away from this opinion, especially given ALU's strong performance in the Fixed Networks and Services businesses, which recently grew 8.6% and 33%, respectively, in the recent quarter.

Cisco, which has been on a mission to buy "anything that grows" in the enterprise area, can certainly leverage ALU's advantage in this market. To that end, I wouldn't rule out Oracle, although that's less likely.

Finally, it comes down to the fact that I'm not convinced ALU is taking the right approach. I don't mind "cutting fat" to look leaner. But doing so at the expense of market share when what little you have is already diminishing each quarter doesn't' make sense.

The company should instead focus on leveraging its strong patents to produce products that its customers want to buy. At that point, profitability will take care of itself.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.
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