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ALU's Cuts Don't Address Long-Term Growth

Stocks in this article: ALU

NEW YORK ( TheStreet) -- Given what many readers have described as "my endless bashing" of Alcatel-Lucent's (ALU) recent cost-cutting efforts, I'm going to tread lightly here while making a couple of points about investor expectations.

As has been the case for most of the year, most investors cheered Tuesday's announcement that the company was cutting its workforce by a net figure of 10,000 people, or 15% of its worldwide headcount. I say "net figure" here because, while the company does plan to eliminate 15,000 jobs, management said another 5,000 will be created as Alcatel-Lucent continues with its restructuring efforts.

It is not yet clear in what capacity these new jobs will strengthen the company, but people close to the situation suggest that ALU plans to shift resources out of legacy technologies, such as the older-model wireless equipment, and begin to focus more on better growth opportunities such as Internet routing.

Again, I don't have an issue with this strategy per se, but ALU is just now beginning to focus on a market in which rivals like Cisco (CSCO), Juniper (JNPR) and Ciena (CIEN) already have meaningful leads. This has been my biggest issue with ALU: While it's true that the company's near-term cash breakeven point will be achieved more quickly, it doesn't address the company's long-term ability to compete in new end markets like the cloud and software-defined networking.

What's more, for a company that's behind in so many categories, I don't understand how investors can continue to applaud ALU's cost-saving measures as management insists on ignoring the importance of market share. In that regard, given that the stock has climbed close to 180% year to date suggests that expectations for this company have grown way too high. Investors will disagree with me on this, but I believe ALU's cost reductions only look good on paper.

Another thing that concerns me about all of this recent excitement is that, aside from the standard corporate lingo about "trimming the fat" and "bringing more efficiency to the organization," management hasn't exactly been forthright about the company's true intentions. When investments are not being made to grow, the usual thought process involves "let's clean it, to sell it."

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