The deal everyone hates is emerging as the deal of the year. In spite of initial scoffing and ongoing misgivings from a range of industry sources, Alcatel SA (NYSE: ALA; Paris: CGEP:PA) seems to be on the verge of buying Lucent Technologies Inc. (NYSE: LU).

The two are said to have finalized plans for a merger over the weekend, with final resolutions from both companies' boards and an official announcement expected Wednesday or Thursday of this week.

Alcatel and Lucent both decline to comment officially yet.

But the papers are full of information: According to the Wall Street Journal, terms include roughly $23.5 billion in stock, in which "Lucent shareholders would receive a fixed exchange ratio of 0.2435 of an Alcatel share for each Lucent share."

Separately, Reuters news service reports that Alcatel will form a new company, incorporated in France but headquartered at Lucent's present head offices in Murray Hill, N.J., with Alcatel CEO Serge Tchuruk taking the helm, at least initially.

Proponents of the deal say Alcatel will not only rescue the remaining assets of Lucent, but will benefit from the expanded penetration into the North American telecom market as a result.

But this morning, shareholders gave a "thumbs down" to the proposed merger. Alcatel's share price fell 1.60 (5.69%) to 26.51. Lucent's shares were trading at 8.29, down 1.11 (11.81%).

Analysts also remain reserved on the advantages of the deal. "It's not going to be easy," says Lawrence Harris, VP at Josephthal & Co. "Acquisitions are always challenging... The advantages remain to be seen." Assuming the deal goes through, it will be at least a year before the full impact is felt and dealt with, he says.

In the near term, there are several concerns, primarily to shareholders of both companies. "There will be some dilution to Alcatel shareholders, who will now own about 58 percent of the combined company," says Harris.

Further, it's almost certain there will be no premium to Lucent shareholders. The value of Lucent's pending completion of the spinoff of Agere Systems (NYSE: AGR) is already reflected in Lucent's share price, Harris says.

Harris also notes that Lucent agreed to pay its bankers $2.5 billion from "non-operational sources" in order to complete the Agere spinoff. It's already raised $519 million through overallotment on the Agere IPO. Originally, Lucent hoped to raise the balance by selling its Optical Fiber Solutions Group, which was the instigation point for the latest round of merger talks with Alcatel (see Lucent/Alcatel Rumors Fly). Whether the credit terms will be reworked or the money will come from the merger settlement isn't clear.

Then there's the matter of technology, product, and human resources overlap. Sources are quoted as saying the deal could realize up to $4 billion in savings from the elimination of duplication in these areas between Alcatel and Lucent.

And that's likely to hit the U.S. hardest, sources say. "There could be tens of thousands of jobs lost there, since it's the area where there's the greatest overlap between Alcatel and Lucent," says one European analyst, who requested anonymity. He figures that up to 80 percent of the cuts contributing to crossover savings will come from the U.S.

On the technology side, it's also a question whether Alcatel will be allowed to purchase all of the assets of Bell Laboratories, the R&D arm of Lucent, because Bell Labs has done classified work in the past for the U.S. government. Still, the Bell Labs patents are a key selling point for Lucent. Experts say any problem patents or technologies are likely to be excised and sold to third parties.

"It's unlikely Alcatel would be interested in Lucent without a large portion of Bell Labs," Harris says. But he cautions not to expect great things from the acquisition: "The Bell Labs of today doesn't have a monopoly on innovation anymore."

It's not clear just how two technology cross-licensing announcements made today by Alcatel would affect the ongoing progress of the merger. Those announcements include technology sharing deals with Corning Inc. (NYSE: GLW) and Sumitomo Corp. (see Alcatel, Corning to Share Technology and Alcatel, Sumitomo Enter Agreement).

"I think it's business as usual," says Lawrence Harris. "This shouldn't have any impact on what's happening with the merger."

Meantime, it looks like all systems are "go" on the combination front. Stay tuned for an in-depth Light Reading analysis of the potential impact a merger could have on the optical networking lines of both companies.

- Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com