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Should We Still Love Alcatel-Lucent Enterprise Tomorrow?

While analysts waited for the Alcatel-Lucent Enterprise (ALU-E) call to begin, the hold music was a mellow jazz rendition of "Will You Still Love Me Tomorrow?" It was pure coincidence, I'm sure, and not a subliminal message, but the question is valid: Should we still love ALU-E in the Fall of 2014, after it has completed its acquisition by China Huaxin? Let's take a look at the proposed deal and see what's to love and what's not to love.

It's a familiar story with an interesting twist. The familiar bits:

* Financially embarrassed carrier infrastructure vendor seeks to cure its ills in part by exiting the enterprise market. Examples: Lucent spins off Avaya; Ericsson passes off enterprise unit to Aastra; Nortel hits the self-destruct button, enterprise business goes to Avaya.

* Rather than being sold to a competitor, the enterprise group is instead picked up by private equity. Examples: Unify-Gores, Genesys-Permira, Avaya-Silver Lake

* The equity firm, instead of acquiring the whole company, just buys part of it, in this case an 85% stake. Examples: Gores and Siemens AG's 51%-49% split of Unify; Silver Lake co-owning Avaya with other investors.

And the twist:

* China Huaxin is, as its name suggests, Chinese. While Chinese companies have been on a spending spree in the US and in Europe, they haven't really been throwing around their M&A money in our cozy little unified communications market. This makes China Huaxin an unknown quantity, something we will all need to get to know and see if we become comfortable with. (More on that below.)

So, what's to love about the deal? Plenty, as it turns out. Just consider:

ALU-E finds a home. Finally! It's such a relief, since the "Wither ALU-E?" question has been hanging around for so long. Would it be bought by a rival and undergo a messy corporate integration and product rationalization process? Would it stay within Alcatel-Lucent as an overlooked and undervalued asset? Would it be spun off into two separate companies--communications and networking?

At least now we know the general path forward. ALU-E goes the private equity route, which Avaya, Unify, and others have helped us all become more or less comfortable with.

Continuity. Not being acquired by a rival means that ALU-E as know it today will likely remain intact. This is unlikely to have been the case if Unify had purchased ALU-E, which was said to be the case as recently as last month. I'm assuming Mitel also had at least a cursory interest in buying ALU-E. Mitel certainly had the interest in expanding its presence in Europe via M&A, given its recent acquisition of Aastra. And we now know that Mitel had the money, given that it spent more for Aastra ($374 million) than the $362 million ALU-E has been valued at in the current deal.

Also continuity-wise, under China Huaxin, ALU-E's comms and network groups will stay together. There will be continued investments, company president Michel Emelianoff explained on last week's call with industry analysts, in ALU-E's still comparatively new OpenTouch and Unified Access platforms, as well as continued development of the company's nascent cloud offerings.

Finally, I expect headcount at ALU-E to remain roughly the same. The company has about 2,800 employees, about half of them in France. Labor unions have long made it clear that they would oppose any ALU-E sale that resulted in a lot of job cuts. I suspect that dealing with feisty French unions is a large contributor to why it has taken Alcatel-Lucent so long to find a buyer for the enterprise group.

Last week Emelianoff said China Huaxin has "provided interesting guarantees for employees around the world," so it looks like protecting jobs is something that ALU-E's new parent is very much aware of. When asked about the possibility of ALU-E transferring R&D operations from the US and Europe to less expensive Chinese firms, Emelianoff was emphatic: There are no plans to move R&D. "We are extremely happy with our R&D centers as they exist today," he said. "There is a strong intent from China Huaxin to protect employment and protect these assets."

Future investment. When investment firms first started gobbling up UC developers, I figured it would more or less be the end of those vendors. The new owners would lay off a bunch of employees, break the company up, and sell off the pieces. Instead we saw the equity-owned companies flush with enough money to make some bold moves that might not have been possible otherwise: Avaya taking on Cisco in the video conferencing systems market by buying Radvision; Unify embarking on a bold new R&D initiative à la Project Ansible; Genesys acquiring Echopass, SoundBite, and several others.

Speaking with industry analysts last week, Emelianoff said that it's China Huaxin's plan to double the size of ALU-E's business over the next five years, and that this cannot just be done simply with organic growth. Acquisitions will be needed, and ALU-E's new owners have the wherewithal to make that happen.

Before moving on, let's dwell a bit on what "double the size of ALU-E's business" means. Alcatel-Lucent has successfully obscured ALU-E's financial health by lumping the enterprise and government business together in financial statements. However, Bloomberg says the enterprise unit generated 764 million Euros ($1.4 billion) in revenues in 2012. On the call with analysts, Emelianoff said in 2013 there was about a 3% overall decrease in revenues, with its communications business down 6% and networking business up 3%. So that would make ALU-E a more or less 741 million Euro ($1 billion) business. According to Emelianoff, ALU-E had a positive operating profit in 2013, as opposed to a 12 million Euro operating loss in 2012, according to Bloomberg. This means (getting back to plans for doubling the business), China Huaxin and ALU-E are shooting for about a $2 billion company by 2018.

International expansion. There's also talk of China Huaxin helping ALU-E expand into new regions. China is an obvious choice given Cisco's difficulties there on the one hand and on the other China Huaxin's ownership of a sizable carrier networking systems developer and established systems integration business in the country. Emelianoff said ALU-E has already begun working with China Huaxin's SI arm: "We signed an agreement [with them] six months ago, and have already revved up the activity with them [which resulted in] some interesting revenue in Q4 last year."

Emelianoff, however, downplayed the notion of the acquisition leading specifically to an increased ALU-E presence in China, saying that he hopes the company will be in a better position to expand where it makes the most sense, be it APAC, MEA, or CALA.

Alcatel-Lucent still has skin in the game. Why is Alcatel-Lucent retaining 15% ownership in the enterprise group that it has long sought to be rid of? I assumed China Huaxin didn't want to pay the full $362 million, or that it wanted to keep Alcatel-Lucent interested and involved in the first potentially unpredictable years after ALU-E is spun off. Emelianoff, when asked about it, said that the 15% stake is to "retain a certain number of synergies we [Alcatel-Lucent and the enterprise group] have developed over the years, both on the technology side as well as the go-to-market side."

This makes sense since ALU-E has been involved in joint sales initiatives that continue to generate revenue. (The years-long University of Pennsylvania Medical Center project is a case in point.) And there are likely issues around patent ownership and ALU-E access to Bell Labs technology, the details of which ALU-E, Alcatel-Lucent, and China Huaxin still need to iron out.

Next page: Potential negatives

And there are certainly aspects of the ALU-E announcement not to love. Among them:

Unknown quantity. I don't know about you, but I'd never heard of China Huaxin before this week. I didn't even know how to pronounce Huaxin before the call with ALU-E. ("Wah-shin" seems to be the accepted way for non-Mandarin speakers to mispronounce it.)

Looking into the investment firm's various assets, it's striking that they all seem to be Chinese entities. ALU-E (someone correct me if I'm wrong) appears to be China Huaxin's only international investment. I'd rather that China Huaxin had a proven record of purchasing and turning around companies outside of China before taking control of ALU-E.

Chinese ownership. ALU-E getting bought by a private investment firm will raise no eyebrows. But a China-based investment company? That's bound to get regulators' attention. Huawei's plans to expand into the US and Europe have been stymied because of security concerns, as was their attempt, way back when, to take partial ownership of 3Com.

It's all become something of a he said/she said debate, with one side saying Huawei has ties to the Chinese government which can spy on us through compromised network gear, and the other side saying "nuh-uh." But that has more to do with the carrier infrastructure market, doesn't it? Huawei selling networking gear and UC solutions to enterprises in the US and Europe continues apace. So maybe this will help China Huaxin's proposed purchase of an enterprise company sail over its regulatory hurdles when it starts encountering them.

Real consolidation. An outside investor buying ALU-E is bad news if you're a fan of industry consolidation. I mean real consolidation where an acquisition results in vanishing brands and end-of-sale products. Where only one company is left where before there were two.

Lots of people say the market for UC systems is still too large. There are too many players, too many products, too much choice. I say, "Meh." What's wrong with competition? What's wrong with choice?

Others seem to agree: When Ovum surveyed hundreds of enterprises and asked what are the chief barriers to investing in UC, "complex vendor landscape" came in dead last. Enterprises just don't seem particularly bewildered by the choices available to them when it comes to UC, and they seem generally confident in their ability to make the right decisions.

So that's my take on the ALU-E acquisition story. If you're an ALU-E customer, partner, or employee, as far as I can see there's a lot to love if the China Huaxin deal goes through as it's currently being described: Stability, continuity, investment, the promise of future growth. And there's plenty to be wary of. Let's see what song we'll all be singing about it this time next year.

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