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August 22, 2006
Another analyst has come out swinging against the merger of Alcatel (NYSE: ALA; Paris: CGEP:PA) and Lucent Technologies Inc. (NYSE: LU), this time criticizing the companies' combined product lineup and the potential decline of Lucent's CDMA franchise.
Analyst Joe Chiasson of Susquehanna Financial Group voiced his concerns in a note issued this morning.
"The evidence that this is a questionable deal for Alcatel shareholders continues to mount, and we are compelled to speak for them even if they have not (yet?) spoken for themselves," Chiasson writes. For Lucent shareholders, though, "this is truly a case of 'Take the Money and Run,' " he adds.
Alcatel's shareholders will vote on the merger Sept. 7 -- the one-year anniversary of Chiasson's initiation of Lucent coverage with a Negative rating, which he hasn't changed.
So far, there's been no sign that Alcatel shareholders plan to vote against the merger, which was announced in April, and the majority of analysts seem to like the deal for both sides. (See Alcatel, Lucent Seal Deal.)
Some of the early concerns about the deal are resurfacing, however. Analyst Per Lindberg of Dresdner Kleinwort released a series of short notes last week opining that Alcatel shareholders should be throwing rotten fruit at the deal, or at least complaining about the price Lucent is commanding. (See Analyst: Alcatel Should Rethink Things.)
Lindberg's concerns included Lucent's pension fund. But Chiasson's thoughts strike more directly to the heart of the merger: What, he asks, does Alcatel get out of Lucent's products?
"We contend that the most recent, and arguably most compelling evidence against this deal is the trend emerging in the CDMA infrastructure market," he writes. "The facts do indeed suggest the long-term outlook for CDMA is quietly and quickly growing cloudy."
CDMA accounts for 45 percent of Lucent's revenues and 70 percent of its operating profits, according to Chiasson -- yet CDMA is on the decline. Of the top 20 CDMA-based service providers, 12 are dabbling with other radio access network technologies, by Chiasson's count. That includes Sprint Corp. (NYSE: S), which recently announced an ambitious WiMax plan. (See Sprint Goes WiMax.)
A year ago, Chiasson believed Lucent's CDMA business would grow 8 to 9 percent per year. "We now believe a 5 percent year-over-year decline would be a far more realistic assessment," he writes (including the emphasis).
Lucent offered a different opinion in its July earnings call, with CEO Pat Russo saying the CDMA market could remain strong. She noted CDMA2000 1xEV-DO Rev A upgrades happening at Verizon Wireless and, uh, Sprint Nextel -- which, in all fairness, did beef up its Rev A plans after the Lucent call. (See Lucent's Russo: Don't Panic! and Sprint Speeds Rev A Rollout.)
Beyond CDMA, Chiasson is concerned about product overlap: "The elimination of 'duplicate' products often introduces uncertainty into the associated revenue stream, such that forecasted synergies are often not what they seem."
Chiasson runs down a few areas where product cancellations look likely but could make for unhappy customers. Both companies have WCDMA platforms, suggesting either Cingular Wireless or Orange SA (London/Paris: OGE), their two main customers, will have to change. (See Alcatel, Lucent Face 3G Decision.) In optical, Alcatel could cancel Lucent's DMX multiservice provisioning platform, but that would risk the wrath of customer BellSouth Corp. (NYSE: BLS)
Other affected areas include the access market, where Lucent's Stinger DSLAM would appear to lose out to Alcatel's 7302 ISAM, and VOIP, where both companies have softswitches.
In a written statement, an Alcatel spokesman says the companies believe they've got a good fit: "From the day the merger was announced, we have been consistent in our assertion that we feel the two companies share the same vision and excellent geographic, product portfolio and customer synergies."
Chiasson believes the Alcatel Lucent deal will get done, "if for no other reason than Lucent's need for this deal is obviously at its highest point." But chalk him up as another voice suggesting a repricing of the deal. Chiasson thinks a ratio of 0.155 to 0.167 Alcatel shares to Lucent shares would be proper, as opposed to the 0.1952 Alcatel/Lucent ratio up for vote.
"We've been very very bullish that we will not reprice the deal," an Alcatel spokesman tells Light Reading, adding that Alcatel has taken Lucent's short-term risks into account.
The merger agreement includes no vehicle for changing the exchange ratio, by the way, so it appears the price can't move unless Alcatel shareholders reject the deal.
— Craig Matsumoto, Senior Editor, Light Reading
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