Cisco Should Pick Off Alcatel-Lucent

When it was announced Monday that Oracle (ORCL) had acquired Acme Packet (APKT) for $2.1 billion, I immediately began canvassing the sector for the next possible candidate.

The first name I came up with was Alcatel-Lucent (ALU) . Although this company had more than its share of challenges in 2012, there are now signs ALU can be an excellent turnaround story.

Granted, this is not the first time I've made this claim. However, the stock has gained 85% since a low of 91 cents per share on Oct. 11 and that means the Street is starting to believe that a recovery is possible.

Despite ALU's recent performance, the stock is still trading at an incredibly low P/E of 3, which is 23 points lower than Adtran (ADTN) .

This means ALU is still trading at cheap valuation, making it an attractive candidate for a company such as Cisco (CSCO) .

Granted, ALU is expected to lose money this year - that's not a surprise. However, with a recent financing pact worth $2.1 billion, ALU has been given time to get its house in order.

This new financing now gives the company some flexibility and latitude to extend maturities accordingly. With liquidity no longer a concern, ALU can begin focusing on execution to enhance shareholder value. With some recent upgrades under its belt, there are now a few more catalysts making the shares more appealing.

With ALU trading considerably below its true potential, Cisco should follow Oracle's lead and make the call.

For instance, many underestimate ALU's IP and optics business, which is trending higher. Plus, the company's newest routing platform already competes well against similar models from Cisco; in some cases ALU's model is better.