My Shaky Case for Alcatel-Lucent

Last November, Alcatel-Lucent was trading at under $1, close to its lowest price in the last 23 years. Even then, there were plenty of people counting on it to fall further, making it France's most shorted stock, according to financial information provider Markit .

One thing investors weren't buying prior to Alcatel-Lucent's Nov. 2 earnings release was that the company's announced layoff of thousands of employees would do enough to refloat it.

But Alcatel-Lucent short sellers got a shock in mid-December when Credit Suisse and Goldman Sachs lent the company $2.12 billion. The stock price has since risen 49%.

Now the question is: Does that infusion of cash really make Alcatel-Lucent a buy? Does it give the company enough breathing room to do the restructuring that CEO Ben Verwaayen proposed in his November earnings conference call ?

This is what the investing world heard from Verwaayen:

• The company has to reduce costs by at least $1.65 billion by the end of 2013. That would require the announced layoff of 5,500 workers, the majority from sales, general, and administrative positions.

• It would have to make more money from its large cache of patents -- 29,000 of them.

• Alcatel-Lucent would need to use its greatest asset, its R&D strength, to reemerge as an "innovation company."

Some caveats
In regards to cutting workers, Verwaayen said they weren't going to take the easy route by removing employees from "the territories where it's easy to adjust your headcount." But discarding European employees is not a simple matter. There are regulatory and legal barriers to get over -- unions, too.

According to the French financial news outlet Les Echos, Alcatel-Lucent unions have already called on the new Socialist Party-headed government to buy a large share of the company. But that could be detrimental to a turnaround if it happens at the cost of keeping on what the company considers non-essential personnel.

Alcatel-Lucent does have valuable patents, but so far monetizing them has fallen short of expectations. The $1.3 billion those patents were supposed to have brought in just hasn't happened . Verwaayen said his company would become more aggressive in its patent licensing initiative.

By the way, those patents were the collateral for that December loan.

R&D has to be the key to Alcatel-Lucent's survival. It is so core to the company's future that it told Reuters last October that 26,000 members of its R&D staff would be protected from cuts. The importance of that can't be overemphasized. With the ever-increasing speed of technological change occurring in the mobile communications world, innovation has to be of the highest priority.

Here's an example. Spectrum, the wireless frequency bands the U.S. government divvies out to mobile operators and satellite companies, is a finite resource. There are just so many useable frequencies that can be squeezed out of the ether. However, with the inundation of smartphone users and their insatiable appetites for speedy downloads, wireless carriers are constantly looking for ways to meet that demand. This is especially critical in densely populated areas, where heavy usage and interference from large buildings can contribute to inconsistent connections.

The emerging technology meant to help solve that problem -- at least for now -- is the development of mini-base stations. These small cells, as they are also called, can be mounted almost anywhere -- on a lamppost or the side of a building, for example -- and they can offload traffic from the macro network transmitters mounted on the large cell towers. By doing that, the network's capacity is increased, and the closer proximity to the end user can provide for higher data throughput .

Enter the Alcatel-Lucent with its small cell product called the LightRadio Metro Cell. The company has been one of the leaders in small cells, and last summer it signed an agreement with Sprint Nextel to deploy its LightRadios in high traffic areas to augment Sprint's 4G LTE capacity .

But Alcatel-Lucent is not the only telecommunications equipment company out there working on small cells. The competition is fierce, which is why bringing out the most advanced products at the right time is of prime importance for the company's success.

Bottom line
Alcatel-Lucent is a company with a good product that now has the cash on hand to beat back the wolves while getting itself back on track. However, investing in this company means waiting for several quarters -- probably more -- before any return would be seen. It is a gamble, of course, so not one to bet the mortgage money on.

Personally, I'd like to buy some of this stock, but not before I see this past quarter's earnings results, which won't be out until next month.

The article My Shaky Case for Alcatel-Lucent originally appeared on Fool.com.

Fool contributor Dan Radovsky has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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