Alcatel-Lucent's New Focus Prompts Enterprise Deal With China Huaxin

G00262412

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Summary

Buying Alcatel-Lucent Enterprise would fill out China Huaxin's business portfolio by expanding its enterprise unified communications and data-networking capabilities. The deal would help Alcatel-Lucent refocus on core areas.

News Analysis

Event

On 6 February 2014, Alcatel-Lucent announced that it is in talks to sell its enterprise unit to technology investment company China Huaxin. Alcatel-Lucent aims to close the deal in 3Q14 as part of its Shift Plan to sell noncore assets. The deal follows its sale of LGS Innovations in December 2013.

Analysis

China Huaxin has made a binding offer to buy approximately 85% of Alcatel-Lucent Enterprise, a business valued at $362 million. The deal would make sense for Huaxin, which has a limited enterprise business. It would acquire:

  • Strong technology in the OpenTouch platform with which to target unified communications (UC)

  • A large installed base of OmniPCX telephony, especially in Europe, the Middle East and Africa

  • A small but growing data-networking business

Overlap is minimal with Huaxin's product portfolio, which would allow Huaxin to focus investment on key platforms, including OpenTouch and OmniSwitch.

Alcatel-Lucent would keep approximately 15% of the enterprise unit. Huaxin's financial backing would enable the unit to increase growth investments. But Huaxin's target of doubling enterprise revenue in largely stable markets over five years is ambitious, even considering both organic and inorganic growth opportunities.

The existing relationship between Huaxin and Alcatel-Lucent could prove useful — Huaxin is Alcatel-Lucent's minority partner for its unit in China, Alcatel-Lucent Shanghai Bell. Majority ownership of Alcatel-Lucent Enterprise by a Chinese entity should increase the enterprise unit's revenue in Asia/Pacific, but it could restrict, or even thwart, the success of the unit's continued focus on the U.S. Alcatel-Lucent's partial retention of a business it wants to exit could disrupt plans that Huaxin may have for the unit.

Much of Huaxin's current business seems focused on the carrier segment. A merger with the enterprise segment runs counter to the trend of disposals of enterprise business among Western carrier providers such as Ericsson (Aastra), Lucent Technologies and Nortel Networks (Avaya), and now Alcatel-Lucent.

Recommendations

Alcatel-Lucent Enterprise customers:

  • Remain cautious about increasing investments in the OpenTouch platform until the deal has closed and Huaxin has outlined its plans for UC.

  • Expect continuing investments to maintain legacy PBX platforms and investments in OmniSwitch networking solutions, as Huaxin's track record gives us no reason to expect that it won't invest in the data-networking side. Recognize that other vendors may have more concrete strategies.

  • Determine how and where development will take place if you're in a market with concerns about Chinese ownership. U.S. government customers in particular should be cautious until further details are released.

Alcatel-Lucent Enterprise customers and prospects:

  • Assess Huaxin's strategy for the enterprise unit's product portfolio and R&D investments.

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