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Alcatel-Lucent's Cash Woes Won't Go Away

Alcatel-Lucent CEO Michel Combes

Photograph by Eric Piermont/AFP via Getty Images

Alcatel-Lucent CEO Michel Combes

Alcatel-Lucent has a new chief executive, a new restructuring plan—and a cash-burn problem that won’t go away soon.

CEO Michel Combes today unveiled a plan to revamp the telecom-equipment company by narrowing its focus to a few high-growth businesses such as ultrafast broadband. “The truth is, we’ve missed product launches and been in too many geographies and businesses,” he told reporters and analysts in a speech in Paris. Combes, who took over in February from Ben Verwaayen, says he also wants to sell off €1 billion ($1.3 billion) in assets and cut costs by another €1 billion.

Sounds encouraging. But Combes’s two predecessors also announced turnaround plans and cost-cutting drives over the past seven years, and the company’s cash pile went right on shrinking—so much so that Verwaayen had to seek a €2 billion loan to gain some financial headroom.

Investors seem ready to give the new CEO a chance. Alcatel-Lucent’s (ALU:FP) Paris-listed shares bounced as much as 7.4 percent on news of his plan.

Combes says he aims to complete the revamp and have the company producing cash flow by 2015. In the interim, though, restructuring costs could make the cash problem even worse. Kepler Cheuvreux analyst Sebastien Sztabowicz says he has raised his 2013 cash-burn estimate to €1 billion, up from €700 million, with an additional €700 million cash outflow in 2014.

Analysts George C. Notter and James Kisner of Jeffries agree with Combes’s strategy and are impressed by some specifics of his plan, such as linking employee compensation more closely to performance. But, they write in a research note, “Alcatel-Lucent has been a perpetrual restructurer. Promises of cost reductions invariably haven’t materialized.”

Matlack is a Paris correspondent for Bloomberg Businessweek.

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