Cisco Should Pick Off Alcatel-Lucent

NEW YORK ( TheStreet) -- Nothing gets investors going like a great dose of M&A speculation.

When it was announced Monday that Oracle ( ORCL) had acquired Acme Packet ( APKT) for $2.1 billion, I immediately began canvassing the sector for the next possible candidate.

The first name I came up with was Alcatel-Lucent ( ALU). Although this company had more than its share of challenges in 2012, there are now signs ALU can be an excellent turnaround story.

Granted, this is not the first time I've made this claim. However, the stock has gained 85% since a low of 91 cents per share on Oct. 11 and that means the Street is starting to believe that a recovery is possible.

Despite ALU's recent performance, the stock is still trading at an incredibly low P/E of 3, which is 23 points lower than Adtran ( ADTN).

This means ALU is still trading at cheap valuation, making it an attractive candidate for a company such as Cisco ( CSCO).

Granted, ALU is expected to lose money this year - that's not a surprise. However, with a recent financing pact worth $2.1 billion, ALU has been given time to get its house in order.

This new financing now gives the company some flexibility and latitude to extend maturities accordingly. With liquidity no longer a concern, ALU can begin focusing on execution to enhance shareholder value. With some recent upgrades under its belt, there are now a few more catalysts making the shares more appealing.

With ALU trading considerably below its true potential, Cisco should follow Oracle's lead and make the call.

For instance, many underestimate ALU's IP and optics business, which is trending higher. Plus, the company's newest routing platform already competes well against similar models from Cisco; in some cases ALU's model is better.

Likewise, ALU has an impressive CloudBand strategy that rivals of some of the more prominent names in the industry, even Cisco's. For this reason, I question how long it will take before Cisco realizes it needs ALU.

Cisco's recent acquisitions, which includes paying $141 million in cash for Cariden and another $1.2 billion for Meraki suggests the company will leave no stones unturned to produce growth.

The cloud market expected to grow to $177 billion over the next three years so it would be foolish for Cisco to not consider acquiring Alcatel-Lucent at a time when ALU shares can be had for pennies on the dollar. For that same reason, it would also be foolish for investors not to consider ALU.

Although carrier spending has yet to fully recover, industry experts believe an increase in demand is imminent, although to what extent remains to be seen. But 2013 can't possibly be worse. This was precisely what Oracle was thinking.

At the time of publication the author had 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 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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