Lucent and Alcatel in merger talks

Stuart Corner
Sunday, 26 March 2006 14:10

IT Industry - Deals

Alcatel and Lucent technologies have confirmed they are discussing a merger, with a statement saying: "We can confirm that Lucent and Alcatel are engaged in discussions about a potential merger of equals that is intended to be priced at market. There can be no assurances that any agreement will be reached or that a transaction will be consummated. We will have no further comment until an agreement is reached or the discussions are terminated."

A merger of the two would create a company with more than $US25 billion in annual sales, well ahead of Ericsson ($US19.4b in 2005) and close to that of Cisco Systems ($US26.2b). Alcatel has a market value of $US21.9 billion and Lucent $US12.6 billion.

There has been widespread speculation that the merger would trigger others. Siemens Communications is already the subject of rumours with Lucent tipped as one of the candidate buyers, prior to this announcement. Nokia was also mentioned as a possible buyer.

Nortel continues to struggle with getting its house in orde: it recently restated its financials once again.

Bloomberg reports that shares of rivals  Ericsson and Nokia and rose as a result of the announcement: Ericsson stock rose two percent to a four-year high.

Alcatel and Lucent were in talks over a possible merger in 2001. The reason the deal fell through has never been made public but it is widely believed that Alcatel balked at Lucent's insistence that the company be run as a merger of equals. One commentator suggested that the two may never have stopped talking and the latest admission could mean that a deal is imminent.

US web site Light Reading commented that Lucent is in a much stronger position than in 2001."After years in the dumps, Lucent is again being taken seriously, thanks to a resurgence keyed to IMS...This time, according to the Wall Street Journal, it's Lucent taking the lead in the merger, with Lucent chief executive Pat Russo being considered as the merged companies' CEO - even though Alcatel's $20.2 billion valuation dwarfs Lucent's $12.6 billion."

The other lead contender is Australian Mike Quigley - a former general manager of Alcatel Australia - who has been recommended by Alcatel's soon-to-retire leader, Serge Tchuruk, as his successor.

Ovum identified the consolidation of the US service provider market as one of the key drivers behind the merger plans. "Vendors are going to be confronted with significant capex rationalisation in the already highly competitive US market. Lucent is very dependant on these operators, and is probably more exposed than Alcatel, though the resurgence of an "AT&T-led Bell system" could favour the company."

Ovum noted that Alcatel was selected by SBC as the key supplier for its LightSpeed NGN project "that is likely to be extended to the whole SBC/AT&T group".  

However, according to Light Reading: "Some in the industry believe Alcatel got bogged down in the LightSpeed project and let Lucent slip under the radar and grab back some of the limelight, a situation that some Alcatel insiders say caused tension between Tchuruk and Quigley."

Also, according to Ovum, Alcatel is under heavy pressure from Asian competitors. "Developing markets and Europe are opening their doors to the Chinese vendors, a move that certainly damages Alcatel's economies of scale there. Expanding in the US means expanding into a market where these players are still 'persona non grata', and which is still 'protected' from these new challengers.

"With one foot on each side of the Atlantic, the combined company could certainly maintain the necessary financial position to support new technology developments and to remain, in the long-term, a key industry leader."

Lucent's CDMA network technology has been identified as one of the most attractive parts of its portfolio to Alcatlel There would, however be many areas of overlap.