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.
"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