From A Mile Away: The Business of Alcatel-Lucent

September 14, 2007 by Joe Ponzio

Washington Mutual has The Power of Yes; we have The Power of No-a much greater power that can be used to avoid major mistakes and horrible businesses. When you invest in mutual funds, you forfeit that power and put it into the hands of the mutual fund managers. And what do they do with that power?

Some of them own Alcatel-Lucent (ALU), and then act surprised and shocked when the company continues to shrink and choke.

Alcatel-Lucent Owner Earnings and Dividends

What does a quick glance at Alcatel-Lucent’s statement of cash flows tell us? For one-the company has spent $2.7 billion more cash than it has generated since 1999. Even worse, the company has also issued some $1.9 billion in dividends in that time. Now, I’m not against dividends; but, dividend payments are supposed to reward owners and allow them to invest excess cash elsewhere.

When a company can’t produce excess cash, or when it is growing so rapidly that it is best for owners to leave that cash in the hands of management, it shouldn’t be paying dividends. In the case of ALU, it looks like management is stuck in the institutional imperative-the age-old thinking of bad management: We’ve been paying dividends forever…everyone else is paying dividends…let’s pay some dividends.

Who’s To Blame?

ALU is blaming its business failures on weakness in its wireless network business. It is much easier to blame an industry, economy, or sector than it is to blame management for bad decisions. Rather than fix its problems at home, ALU is aggressively acquiring other businesses.

ALU: The Small Business Perspective

Let’s simplify this business and think like small business owners. If I ran a business that couldn’t generate cash and that was struggling, I certainly wouldn’t

  • buy $4.8 billion worth of other businesses,
  • burn cash by paying dividends,
  • pay myself (or my CEO) $1.96 million a year, no matter how hard I/she had to work,
  • focus on high growth when I should be focusing on survival.

Don’t Be Taken By Surprise

You could have seen ALU’s weak earnings and problems from a mile away-and years ago. A mere glance at the company’s financial statements would have told you to run, and an in-depth look would have told you to never turn back.

ALU is one of those companies that are highly uncertain and, at least for now, are generally bad. The Power of No.

But You May Still Own It

It is the job of the mutual fund and institution to gamble in stocks. Perhaps that is why some 25% of ALU’s stock is held by these institutional gamblers (among others). What is their motivation? Maybe they held Lucent in the late 90s and never let go. Perhaps they’re trying to eek out a profit on a huge risk.

Either way, do you really want your retirement money in Alcatel-Lucent? I don’t.

Oh, and what is the solution to Alcatel-Lucent’s problems? Who knows? That’s not my problem-I’ll exercise my Power of No and move on.

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