Alcatel (NYSE: ALA; Paris: CGEP:PA) and Lucent Technologies Inc. (NYSE: LU) announced today (Sunday) that they've agreed to merge, creating a global supplier of fixed and wireless telecom infrastructure with annual revenues of $25 billion, a market capitalization of about $36 billion (based on Friday's closing stock values), and 88,000 employees.

The news comes just nine days after the two firms admitted they were in talks. The deal has been approved by the boards of both companies. (See Reports: Alcatel/Lucent Deal Nears.)

Lucent shareholders will receive 19.52 percent of an ADS (American Depositary Share) for each ordinary share of Alcatel they own. Once the deal is completed, current Alcatel shareholders will own 60 percent of the new company and Lucent's shareholders 40 percent. The new company's stock will be traded on the New York Stock Exchange and Euronext Paris.

Lucent CEO Pat Russo will retain that position at the newly formed company, which will be named at a later date. Alcatel's current CEO, Serge "The Merge" Tchuruk, will be non-executive Tchairman. Alcatel's Mike Quigley, who was set to replace Tchuruk as CEO this July, will be chief operating officer. (See Lucent & Alcatel: Quigley or Russo?.)

Each company will appoint six directors to the new company's 14-person board, which will include two "new independent European directors to be mutually agreed upon." The deal is expected to close within six to 12 months, subject to approval from regulators, government bodies, and the two firms' shareholders.

As expected, a separate subsidiary, managed by a board comprising three U.S. citizens, will be formed to deal with Lucent's U.S. government agency business. Concerns had been raised about allowing a non-U.S. company to have any role in Lucent's security-related contracts and Bell Labs developments.

As for Alcatel's sensitive satellite business, Tchuruk is to continue negotiations with French defense firm Thales SA (Paris: TCFP.PA) about a deal that would see Alcatel increase its current 9.5 percent stake in Thales to between 25 percent and 30 percent in return for its satellite subsidiary.

The companies believe the merger will create $1.7 billion in cost savings within three years of the deal closing. Those savings will come from combining multiple corporate functions that will result in a workforce reduction of about 10 percent, or approximately 8,800 jobs.

That could cause some problems for Alcatel's management, reckons Heavy Reading senior analyst Patrick Donegan. "What's surprising is that Alcatel has decided to press ahead with this in the midst of France's current political troubles. Much of these revolve around popular fear of economic globalization, and in particular the fear of French companies and employees having their status undermined by global mergers and acquisitions...

"This deal is undoubtedly the right thing from the perspective of the global telecom sector. The question now is whether it can go through politically. Politics played a part in obstructing these two companies' first attempt at a merger. Six years on, politics could easily undermine it all over again."

The merger will also cost the new company about $1.7 billion in restructuring charges, which will mostly be recorded in the first year. The vendors clearly state that the "transaction is expected to be accretive to earnings per share in the first year post closing with synergies, excluding restructuring charges and amortization of intangible assets."

"A combined Alcatel and Lucent will be global in scale, have clear leadership in the areas that will define next-generation networks, boast one of the largest research and development capabilities focused on communications, and employ the largest and most experienced global services team in the industry," stated Tchuruk in a prepared statement.

Russo added: "The strategic logic driving this transaction is compelling. The communications industry is at the beginning of a significant transformation of network technologies, applications, and services -- one that is projected to enable converged services across service-provider networks, enterprise networks, and an array of personal devices. This presents extraordinary opportunities for our combined company to accelerate its growth.”

Those opportunities will be aided by strong positions in increasingly hot sectors such as IMS (IP Multimedia Subsystem) and IPTV. (See Merger Would Benefit Lucent in IPTV and Lucent Lands BellSouth IMS Deal.)

The vendors say that, once merged, they will have "strong, long-term relationships with every major service provider around the world," and "the largest and most experienced global services and support organization in the industry," with a presence in more than 130 countries worldwide.

In addition to Russo, Tchuruk, and Quigley, other senior executives will include: Lucent's current COO Frank D’Amelio, who will be senior EVP with responsibility for integration and operations; and Alcatel's CFO Jean-Pascal Beaufret and senior VP of human resources Claire Pedini, who will retain their roles at the new company. Other major positions, such as CTO, will be filled at a later date.

With Alcatel and Lucent creating such a powerhouse, other vendors are expected to follow suit as consolidation fever grips the telecom sector. (See Alcatel/Lucent: The Domino Factor, IPOs & M&A: London Gossip, Sources: Lucent, Nokia in Play for Siemens, AT&T Deal Could Spur Cable Buys, and Ma Bell Is Back!)

— Ray Le Maistre, International News Editor, Light Reading