Optical/IP Networks

Alcatel, Lucent Throw in the Towel

Alcatel SA (NYSE: ALA; Paris: CGEP:PA) and Lucent Technologies Inc. (NYSE: LU) have called off talks that had the industry buzzing for the last two weeks (see Lucent/Alcatel Rumors Fly).

In a prepared statement issued this afternoon, the two companies admitted they'd been discussing a merger but talks had ended. They declined to comment further.

Few observers seem surprised. Indeed, many seem relieved. "How could anyone think this was a good idea?" an executive with one startup that competes with both companies said anonymously today. "Neither company acquires well. There's a lot of conflict, a lot of serious overlap in product lines that could keep them snarled for years."

Despite appearances that the deal may have collapsed under the sheer weight of the complications involved, it's not clear just what really ended the talks. According to the Wall Street Journal, Lucent executives were put off by a reported lack of equal representation in the management and board of the proposed company.

The paper said terms reached over the weekend called for Alcatel to pay 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 reported that Alcatel intended to 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. Reuters had the deal pegged at $32 billion.

But problems amongst executives weren't the only downsides seen for the proposed merger, which was a nearly universal turnoff on Wall Street and Main Street alike. Here are the main reasons for its unpopularity:

  • No shareholder value: "There would be some dilution to Alcatel shareholders, who will now own about 58 percent of the combined company," says Lawrence Harris, VP at Josephthal & Co.. Further, it's almost certain there would have been 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.

    Not surprisingly, shareholders of both companies gave a "thumbs down" to the proposed merger. By end of day Tuesday, Alcatel's share price fell 0.70 (2.49%) to 27.41. Lucent's shares were trading at 8.32, down 1.08 (11.49%).

  • Lucent's financial problems: 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. In the event of a merger, the credit terms would have been reworked or the money would have had to come from the merger settlement.

  • Technology, product, and human resources overlap: Sources were 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.

    But that could have 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," said one European analyst, who requested anonymity. He figured that up to 80 percent of the cuts contributing to crossover savings would come from the U.S.

In all, termination of the Alcatel/Lucent merger seems to have raised many questions, not all of them complimentary to either firm. It seems to rankle that the talks went on so long without official acknolwedgement other than selective "leaks" to key publications; that the proposed merger threatened so many jobs and so many products; and that in the end it all came to nought, reportedly over executive infighting.

"Whether or not you thought this was a good or bad idea to merge the firms, it is interesting to think about what has (for the moment) killed the deal... What mattered was the ego of Lucent executives," wrote one contributor to Light Reading's message board.

It remains to be seen whether Lucent will continue to seek outside buyers, and if so, what form a merger will take. Stay tuned.

- Mary Jander, Senior Editor, Light Reading
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flanker 12/4/2012 | 8:21:38 PM
re: Alcatel, Lucent Throw in the Towel I said this didnt wouldnt fly last week.

1) FTC won't approve it.
2) Shareholder reaction is not necessarily relevant. Plenty of mergers have been consumated after the acquiror's shares declined.
3) Cost savings don't address the fact that fewer competitors means higher profit margins and less competition. This is the fundamental premise of anti-trust law. Cost savings may be important to share holders, they are not issues to regulators.

zher 12/4/2012 | 8:21:32 PM
re: Alcatel, Lucent Throw in the Towel This merge is realy a joke.
skeptic 12/4/2012 | 8:21:28 PM
re: Alcatel, Lucent Throw in the Towel
Its really not very complementary to light reading when you reach the point where you are
quoting contributors to message boards as sources for what broke down the negotiations.

Blaming the "ego" of the Lucent executives suggests that somehow this deal, in spite of the fact that shareholders and analysts hated it,
"should" have been done and that not doing it
was somehow the fault of the people running

Yesterday, Alcatel tested its 52-week low. In the middle of the day, the stock was further down than where it ended the day. Every day the deal
was discussed also resulted in further downward
pressure on Lucent.

Many bad things can be said about the people running lucent, but blaming their "ego" for not signing on to a deal which would have given shareholders nothing is beyond sense.
rafaelg 12/4/2012 | 8:21:27 PM
re: Alcatel, Lucent Throw in the Towel Ditto.

Both companies are not giving any more details.
But I can't help thinking if this was a planned disruption to test the waves.
Neither Co experienced a stock increase. Rather, LU/ALA price declined over the period.

I guess the joke was on us?

Titanic Optics 12/4/2012 | 8:21:24 PM
re: Alcatel, Lucent Throw in the Towel >>Blaming the "ego" of the Lucent executives suggests that somehow this deal, in spite of the fact that shareholders and analysts hated it,
"should" have been done and that not doing it
was somehow the fault of the people running

If I were to do a trial balloon, I'd probably try to leak news of preliminary talks rather than involve bankers CSFB, MSDW, JPM Chase, Citibank/SSB, and two law firms. Despite a merger ostensibly being bad for shareholders and analysts hating it, the deal was apparently going to go through. The snapping point was that Alcatel had 8 board seats, Lucent 6, with 2 to be named later. The dispute was over who would name those two seats. Had this dispute not occured, the deal would have gone through.

(There apparantely was no hang up over the fact that this deal was bad for both LU shareholders and worse for ALA shareholders--in fact, after news of the merger talks ending broke, but prior to Alcatel's announcement of the 3 B euro loss, Alcatel's stocked spiked up nicely in Intra-Day trading, much more so than Lucent's did.)

There are two ways to look at this, depending on how much benefit-of-the-doubt you want to give LU executives:

A) Lucent executives were willing to do a deal with no premium in the short term; in the long term, it was dubious whether a deal would be good for LU shareholders as there are a lot of problems that have been noted with a merged entity. Massive layoffs would have to occur given product overlap, but that was ok with LU management. Seeing synergies in a trans-oceanic merger may also be problematic, particularly in light of a softening market for their products (Daimler-Chrysler comes to mind as an example). But none of those reasons killed the deal--what killed it was that senior executives wouldn't be on an equal footing.

B) Lucent is in dire straits. Thus, it is willing to concede to a "merger of equals" wherein it may not really be "equal" as ALA shareholders will control 58% of the company, and the company will still be chartered in France. However, Lucent will control an equal number of board seats, and there is an understanding that it is a merger of equals and the headquarters will be in NJ. Given the understanding about it being a merger of equals, when the companies get their heads together and sort out the combined entity, the decisions about what to keep, what to cut, and what to fund will be made in the most optimal way (the most beneficial way to shareholders.) The only way that ALALU could possibly overcome all the challenges outlined by skeptical analysts is to fairly pool their heads and decide things dispassionately, choosing the best player at each position.

The Lucent team had reservations all along, but in their zeal to solve their firm's problems, they weighed the pros and cons of the deal. The board seats were the straw that broke their back--all the other reservations (return to shareholders, overlap) always existed. Without a fair representation on the board for LU, there was no guaruntee that decisions about the combined entity would be made in a manner most optimal for the future benefit of current LU shareholders, many of whom would keep their holdings and take their chances with the new ALALU firm.


Call me cynical, but I'm a bit skeptical about B). Lucent executives don't have a great track record in make the most optimal decisions about what to what to keep, what to cut, and what to fund haven't been stellar. In fairness though, if I were them, I wouldn't be confident Alcatel executives would do much better, so I could give a slight nod to them for pulling out at the last minute. Somebody mentioned Cisco as a potential acquirer not Alcatel, even if that could happen (won't), Cisco's record in acquiring Comm equipment, outside of Cerent, has been poor. (Pirelli, Monterey).
Titanic Optics 12/4/2012 | 8:21:23 PM
re: Alcatel, Lucent Throw in the Towel Aside from how this tracking stock and spinoff affected the scotched merger, they are bellweathers given their sales of 1550 nm transmit lasers.

I've heard scary rumors about how big the slowdown really is at Agere (in terms of capacity utilization), and also cryptic news reports (today) that ALAO is doing poorly. Agere is a market leader at transmit lasers, if they are massively slowed down then this means more than AGRa and LU are hurting, it means something worse for the whole industry. AGRa is a leader in selling transmit lasers (don't think say, Multiplex, has taken over yet), so this means that 30-odd systems companies are ALL collectively hurting, too.

Anybody hear anything here? So much for the "V" shaped recovery.
jmd 12/4/2012 | 8:21:23 PM
re: Alcatel, Lucent Throw in the Towel ThereGăÍs no reason to doubt the statements that control was the issue. The information leaks were rather detailed and included some credible numbers (nobody disputed the numbers) so a leak about control being the issue looks just a credible.

Regardless, the deal is dead and that is good. Neither ALA or LU looks good after this so it was a mistake to leak the information or even acknowledge that something was up. (leaks at about these sorts of things are deliberate trial balloons G㢠not some coffee boy faxing the minutes to WSJ)

At best LU could have hoped for a Gă merger of equalsGăÍ but that is obviously dreaming, no matter what the price is. Ability to restructure quickly would have been a top requirement of the deal G㢠especially when youGăÍre about to warn on earnings.

Anyway this just made both LU and ALA look foolish and impulsive. On the bright side we can only say that at least they didnGăÍt do it.
luxPath 12/4/2012 | 8:21:22 PM
re: Alcatel, Lucent Throw in the Towel Consider this..

Somehow a "no premium" deal with ALA is a good idea (in LU management's view), UNTIL senior management roles in the U.S and the power on the board are threatened. Score one for the self-preservationists!!

Lucent has several genuine competencies, yet they lack functional execution skills. Everyone knows current market conditions are tough--anyone can sell into robust markets when all boats are rising with the tide. The essential test of management is how you navigate a slowdown!!

Yet rather than reengineering LU to create a distinctive firm (leveraging strengths in network management, wireless, and some optical) management seeks a merger that would clearly further divert attention from solving the real issues.

Lucent isnGăÍt the first giant firm to need a turnaround....just ask Lou Gerstner what shape IBM was in 1993.

This proposed transaction was a silly waste of precious timeGă÷management could have been developing a strategy based on the creation of economic value and sustainable competitive advantage.
gardner 12/4/2012 | 8:21:17 PM
re: Alcatel, Lucent Throw in the Towel The flaws present in both Alcatel and Lucent management are not at all uncommon in large multinationals. This apparent lack of ability of many organizations to achieve their full potential brings up a very interesting question: why?
Are there any companies of similar size (say 100K employees) that perform well? The large oil companies seem to do it but perhaps that is the nature of the business. Maybe the current organizational structure fits oil better than high tech. Maybe activities like high tech are ill served by deep hierarchical structures like those of Alcatel and Lucent? What are the thoughts of people on this subject? Can high tech be managed in the same way as retail or oil or construction? Do deep hierachies prove too unwieldy and entrenched to provide nimble management in the high tech sector?
joe_average 12/4/2012 | 8:21:14 PM
re: Alcatel, Lucent Throw in the Towel >>. Maybe activities like high tech are ill served by deep hierarchical structures like those of Alcatel and Lucent? <<

I have been thinking along the same lines lately. Having spent my first working decade at a one of the big three networking companies, I thought that it was normal to be continuously reorganized and have some new direction and initiative foisted on you every 6 months or so. I once had four (!!) VPs between me and the CEO. Surely they were not all adding enough value to justify their salary and options.

Now working in a start-up, it is evident that a much more powerful paradigm is having a close-knit group focussing on a common goal. Little management hierachy (although in a previous start-up there was surprising lots of management!), everyone "incented" with stock options, underperformers having no place to hide, etc. all lead to a company being able to produce a product quickly.

This has, of course, been the reason that Cisco was so successful buying start-ups. They let start-ups focus on the tough parts and purchase the company when a stable strategy/product has emerged (naturally with some exceptions!).

The only advantages that larger companies have are a brand name, more complete network solutions and an established sales/operations infrastructure.
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