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Alcatel/Lucent Work Continues

Light Reading
News Analysis
Light Reading
5/29/2001

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

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johnjohn
johnjohn
12/4/2012 | 8:21:54 PM
re: Alcatel/Lucent Work Continues
i'd like to see what the opinion of this board are. i've already posted that this deal does not give me "a shot in the arm".

it looks as if we are throwing in the towel. maybe it would be better to sell the company in pieces. perhaps we would save some good people from losing their jobs.
Milano
Milano
12/4/2012 | 8:21:53 PM
re: Alcatel/Lucent Work Continues
Food for thought, from UBS Warburg...

Summary:
We would view a Lucent/Alcatel combination as positive for the rest of the
telecom equipment industry over the next 18 months to two years. The merger
approval and integration process for this potential deal would take at least
18 months, if not longer. During this period, we believe competitors may
find it easier to take advantage of uncertainty pending the final merger
integration. In addition, we would expect reduced pricing pressure in the
industry.

Highlights:
We emphasize the following points.

(1) Less Competition: A combined Lucent/Alcatel would reduce competition in
the industry. Alcatel (ALA-$28.11-Hold-+) and Lucent had about 12% - 15% each
of the global telecom equipment market in 2000. A combination of the two,
would likely lead to reduced price pressure, and competitive offerings,
particularly in areas such as optical, access products and 3G wireless
systems.

(2) Market Share: Opportunities During Next Two Years
While this potential merger would make LU/ALA the largest player globally in
telecom equipment at about $50B in revenues and over 240K employees, there
would likely be uncertainty during the merger approval period and the actual
integration process. Competitors are likely to benefit from this uncertainty
period, which could last up to two years (9+ months) for merger approval and
1 year or more for integration. In particular, this will be more likely in
product areas that are addressing new technologies and in which LU and ALA
compete against each other. Examples would include high channel count DWDM,
40 Gbps SONET / SDH, optical cross-connects, STS-1 grooming cross-connects,
metro optical, next generation core ATM switches and 3G wireless. The
potential of this merger could make customers less comfortable in selecting
any of these next gen products as certainty as to which products will
survive the merger would not be known. Competitors are likely to create
uncertainty/doubt in customer minds in picking either ALA or LU.

Below is how we believe companies we cover would benefit from this potential
merger due to either less competition or pricing pressure (++ very positive,
+ positive).

TELLABS (TLAB-$38.65-Hold): Titan 6500 product approvals (++), Titan 6700
product approval (+), Pricing Pressure Titan 5500 (+)

CIENA (CIEN-$60.73-Hold): DWDM Pricing pressure (++), Core director product
approval & pricing pressure (+)

NORTEL (NT-$14.60-Hold):40 GB/S product approval (++), Pricing pressure on
SONET/DWDM (++), Metro optical (+), 3G Wireless (+)

CISCO (CSCO-$22.08-Hold): DSLAM pricing pressure, product approval (++), ATM
core switch (+), Metro optical (+)

ADC (ADCT-$8.60-Hold): DSLAM pricing/product approvals (+)

CORNING: (GLW-$21.55-Hold): Fiber pricing (++)

MARCONI (MONI-$11.10-Hold-+): SDH/DWDM pricing pressure (++), ATM core switch
(+), Access products (+)
Brattain
Brattain
12/4/2012 | 8:21:52 PM
re: Alcatel/Lucent Work Continues
The idea that a LU/AL merger will be good for their competitors is ludicrous.

This merger is the first sign of an industry wide consolidation. Just like Lucent's downfall last year was an early sign of a major slowdown in telecom spending, this merger is a sign that there is way too much duplication amongst system vendors.

To all the 15-20 startups doing copy cat
optical networking boxes (especially you metro wanna be's), 90% of you will be gone within a year.

So if you're a startup celebrating a LU/AL merger, first realize your own funeral is about to begin.
Brattain
Brattain
12/4/2012 | 8:21:52 PM
re: Alcatel/Lucent Work Continues
The idea that a LU/AL merger will be good for
competition is ludicrous.

This merger is the first sign of an industry wide consolidation. Just like Lucent's downfall last year was an early sign of a major slowdown in telecom spending, this merger is a sign that there is way too much duplication amongst system vendors.

To all the 15-20 startups doing copy cat
optical networking boxes (especially you metro wanna be's), 90% of you will be gone within a year.

So if you're a startup celebrating a LU/AL merger, first realize your own funeral is about to begin.
fatchance
fatchance
12/4/2012 | 8:21:52 PM
re: Alcatel/Lucent Work Continues
'OK', everyone go to sleep (at LU/Al)while we 'figure out' the merger. What BS. LU is like a ship in motion, it just keeps plowing on. Billions in sales, thousands of sales people working away. A friend at LU used to say after a major screw-up, "...and yet we make billions!" The momentum and huge product line they have, even with problems, will mean they will still compete. A merger will delay future product decisions but everything doesn't come to a full stop. Just dumping the senior management and the board will increase effectiveness ten fold.
reoptic
reoptic
12/4/2012 | 8:21:51 PM
re: Alcatel/Lucent Work Continues
Plusses:
Global Sales Synergy
Lots and lots of existing customers
Economies of Scale

Minuses
Overlapping product lines everywhere --
-- and still lousy IP product portfolio!
Horrific coordination with two 100K person firms spread across multiple continents
Herculean cost cutting and systems integration required

Conclusion
Maybe Jack Welch could pull this off -- over 5-10 years; don't see him in either team. The ambition and arrogance behind this one is collossal...
jmd
jmd
12/4/2012 | 8:21:51 PM
re: Alcatel/Lucent Work Continues
This proposed merger will create opportunities for stock market investors and LU/ALA competitors G«™ maybe even very large opportunities! However, a great many people will loose their jobsG«™

I donG«÷t know that the industry needs this to happen.

1.It smacks of the market share approach that got us into the current ills. I thought we just learned that you have to have something other than market share (i.e. products and income). The market shares are complementary but how complementary are the product lines? IG«÷ve yet to see anybody say something positive about the product lines being complementary other than thereG«÷s a large rationalization opportunity.
2.Just because something seems like a bargain and you can buy it doesnG«÷t mean you should. Surely, thereG«÷s a slow-burn / low-risk path to get you into the North American market. Betting everything on one very large acquisition is much riskier than making a number of smaller ones.
3.The market winds are not blowing G«™ temporary of course but what if itG«÷s prolonged? What if the tough weG«÷re in is 18 months?
4.ThereG«÷s a reason why LU seems like such a bargain right now. LUG«÷s board must be just peeing themselves hoping this thing goes through. Having no choice but to proceed with the recent IPO in a terrible market to get whatever they can speaks very loudly about LUG«÷s desperate financial shape.

The merits seem to be market share and cost savings through rationalization of product lines. The problems seem to be the scope of the challenge and the market uncertainties. The make-up of the new board and executive team will be critical. Clearly, for this to work ALA must take strong control and execute plans quickly. This talk about G«ˇmerger of equalsG«÷ better be just PR bullshit as the last thing needed is prolonged pissing contests over product line rationalization.

On the bright side this should help the startup environment as ALA/LU shed important people.

Pass the paper bag G«™ IG«÷m hyperventilating
Titanic Optics
Titanic Optics
12/4/2012 | 8:21:49 PM
re: Alcatel/Lucent Work Continues
>>Minuses
Overlapping product lines everywhere --
-- and still lousy IP product portfolio!
Horrific coordination with two 100K person firms spread across multiple continents...Conclusion
Maybe Jack Welch could pull this off<<

Dead on! Correct me if I am wrong, but in France there is an implicit guaruntee of lifetime employment and it is very difficult to downsize on any kind of a significant scale. Yet, that is exactly what will be needed here, and if there is any value to Lucent, some of these cuts will have to occur in France. I can't see the ALA senior team cutting in France very much at all, and not on a significant enough level in the US.

Neutron Jack could pull this off, if allowed to do so. But, even if the ALA senior managers decide to cut enough areas, they are prevented (by law?) in France, and by their own cultural habits from doing so in the US. My guess is they are going to hope their way out of this mess.

Good luck.
Titanic Optics
Titanic Optics
12/4/2012 | 8:21:49 PM
re: Alcatel/Lucent Work Continues
Just how aggressive would a combined company be in eliminating areas of overlap? Lucent is a company that needs to be pared back as it is now, and needs to be more aggressive than, "on schedule and have laid of 2000 of a planned 10,000". Yes, getting rid of some of the upper management is a help, but whole chunks of this firm need to be gotten rid of to free up the good, inspired people. Other firms in other industries, when faced with the same circumstances, act far more quickly and aggressively. (GE early on under Jack Welch, any defense company in the early 90s, etc. etc. ...)

I can't see Alcatel being aggressive enough in dismembering the bad parts of Lucent. Putting two bloated firms together results in an even bigger mess. Alcatel gets away with it, probably because their board is a rubber stamp board. What do ALA senior managers want, a trophy? They are tasked with earning their shareholders a return, not making trophy acquisitions. I can't see this being a successful acquisition in light of the challenges, at least not for shareholders of "ALALU".
exlu
exlu
12/4/2012 | 8:21:48 PM
re: Alcatel/Lucent Work Continues
Perhaps I'm stating the obvious here, but there doesn't seem to be any pluses for LU in this deal (read -- no premium, huge layoffs). Which can only mean that things are far worse for LU than even the most bitter and pessimistic of us ex-lucent people could have dreamed. Having said that the pluses for ALA seem superficial at best. There will be a mass exodus of the best people (those that are left) and there will be some titanic inter-company battles with the entrenched (read -- switching). With all the bad blood from layoffs, in fighting and attrition I don't see how they will salvage any of the current product line, or attract new employees for that matter. Could someone with more business acumen than I explain why ALA would want this deal?
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