Alcatel-Lucent: Two Bad Companies Do Not Make It Right

Shares of Alcatel-Lucent (ALU) are down 12% in trading in Europe. The company warned on revenue for the third time this year.

The merger of the two companies started out with such promise. Management could take out hundreds of million of dollars in redundant costs. The company would have a much larger sales force. Competitive pricing would come out of the market as the two companies would no longer go after the same business. And, serving the growing telecom industry would be money in the bank.

According to The Wall Street Journal "Alcatel-Lucent said in a statement it now expects revenue growth in 2007 to be flat to slightly up at a constant euro-dollar exchange rate. The company had previously estimated its full-year revenue would grow in the mid-single digit percentage range at a constant exchange rate."

The new company faces two problems. The first is that there is probably still too much competition in the market. Ericsson. The Nokia-Siemens. Nortel (NT).  Huawei in China.

Results at Nortel indicate that the telecom equipment supply business is really not very good. It is barely a break-even operation and in not growing. It shares have been beaten like a drum.

Casting a shadow over the entire industry is the specter of Cisco (CSCO) which is able to bring next-generation routing systems to both telecom and cable. New solutions generally trump old ones.

The merger is not a failure because the companies could not cut costs. It is a failure because the new company is in a lousy industry.

Douglas A. McIntyre