Optical/IP Networks

Lucent/Alcatel Rumors Fly

Alcatel SA (NYSE: ALA; Paris: CGEP:PA), which has long been in talks with Lucent Technologies Inc. (NYSE: LU) about Lucent's fiber business, is now in talks to acquire the whole company, according to several published reports.

There are plenty of reasons to be skeptical. For one, Alcatel has been actively shopping around for an American networking company for the past year and has seemed reluctant to pull the trigger. In addition, the deal doesn't have much to entice either side of the bargaining table -- except maybe those who think Lucent needs to be bailed out.

Today's New York Times reported that sources close to Alcatel and Lucent say a deal, if it happens, would be a "nearly all-stock transaction that would represent about a 20 percent premium over Lucent's current value of $33.5 billion." Still, the paper's sources reportedly "described the odds of the deal happening at 50-50."

The Times report kicked off speculation. But today's market activity seems to bear out shareholder distaste for the deal. As this went to press, Alcatel shares were trading at 29.50, down 2.54 (7.93%). Lucent's share price was 10.06, up 0.25 (2.55%). In other words, Alcatel shareholders seem to dislike the prospect and Lucent shareholders either don't believe in a share-price premium or are skeptical of the deal altogether.

Talk of an Alcatel/Lucent merger has persisted ever since Lucent confirmed that it was trying to sell its Norcross, Ga.-based Optical Fiber Solutions Unit (see Lucent's $5 Billion Question) and Alcatel admitted to bidding on it. Indeed, while neither firm will comment on any aspect of the rumors of a full-out merger, analysts say talks have been active for awhile and that they escalated after the recent departure of Lucent's CFO Deborah Hopkins (see Lucent CFO Quits, World Yawns), who they say opposed a merger.

"I think the chance of [a merger] is quite likely, but I don't think it would be a good deal for the shareholders of either company," says Ariane Mahler, analyst at Dresdner Kleinwort Wasserstein. She says overlap between the two firms in all areas would make it tough to gain immediate value from uniting them.

Alcatel has been eyeing Lucent, sources say, to gain more traction in the U.S. market, to widen its influence among U.S. carriers, (particularly the former RBOCs), and to gain access to the rich portfolio of Bell Labs technology.

There's even speculation about a CEO for a new company emerging from the buy: "Krish Prabhu [COO of Alcatel] is talked about as a potential head of the new company. He has already been approached for the CEO jobs at Lucent and Nortel," says Mahler.

But observers say there are significant obstacles. Some point to the risks Alcatel would take in acquiring a company with many strategic and financial problems, including massive debts and mounting losses. Much depends on the potential terms -- and that could be the sticking point in the talks.

"I know the CEOs are talking. But every time Lucent gets the price up the deal gets derailed. Cash is tight at Lucent. At $10 or $11 a share, there's no premium," said one industry source with connections to Lucent, who asked that name and firm be withheld. Indeed, the market, pricing Lucent's stock at $10.20 on the news, did not appear to handicap a premium into the current price of the firm's shares.

And there may even be regulatory issues, given that both companies own sizeable shares of specific segments of the worldwide telecom equipment market, such as ATM equipment. Carriers may object to further consolidation of a market that already has a limited number of top providers.

Alcatel has recently established a pattern of acting acquisitive and then backing down -- almost always because of concerns about the price or due diligence issues at the potential acquiree. In the past year, Alcatel's said to have been in talks with a range of companies, including Alidian Networks Inc., Astral Point Communications Inc., Geyser Networks Inc., Tachion Networks, and Zaffire Inc. (see Alcatel Seeks to Buy Optical Startup). Nothing's come of any of these talks so far.

There's also a chance that another Lucent suitor may emerge. Nokia Corp. (NYSE: NOK) and Siemens AG (NYSE: SI; Frankfurt: SIE) are both said to have considered bids. Also not to be discounted are the potential buyers of Lucent's fiber unit, which include Pirelli SpA and a range of Japanese companies.

Neither Lucent nor Alcatel will comment on any aspect of the rumors. And the bottom line seems unclear. As one analyst put it, "There are too many rumors to know what's right..." Still, some are hedging their bets. "I'm not sure this would provide any value for shareholders. In fact, I'm thinking about taking my target price down [on unspecified figures for both ALA and LU]," says Ariane Mahler.

- Mary Jander, Senior Editor, and R. Scott Raynovich, Executive Editor, Light Reading
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optical 12/4/2012 | 8:24:30 PM
re: Lucent/Alcatel Rumors Fly An Alcatel - Lucent deal with be a total diaster!!! Buying the optical fiber piece is a good deal, but all of LU, that's a loser.
flanker 12/4/2012 | 8:24:30 PM
re: Lucent/Alcatel Rumors Fly The FTC will not approve it.
leer 12/4/2012 | 8:24:30 PM
re: Lucent/Alcatel Rumors Fly In light of the current telecommunications market and economy, the merger of Alcatel and Lucent makes emotional sense. Decisions of this magnitude are made based on emotions and then justified with logic. I predict by the end of June a deal will be announced.
alglin 12/4/2012 | 8:24:28 PM
re: Lucent/Alcatel Rumors Fly
Lucent IS a total disaster.
Not sure if the fiber optic division
is a good deal, either.

melao 12/4/2012 | 8:24:18 PM
re: Lucent/Alcatel Rumors Fly Bell Labs is not a disaster. Lucent's problems has more to do with management than products.
Their portfolio is awesome.

Sometimes i think people in this forum are new to the telecom market.
manoflalambda 12/4/2012 | 8:24:16 PM
re: Lucent/Alcatel Rumors Fly Good question.

I heard Alcatel and Lucent own most of the total DSL market (ADSL and SDSL), with Lucent's Stinger having Alcatel chips. Lucent now has a shipping OXC. Probably lots of OEO Sonet gear overlap in Xcons and DWDM...

John Honovich 12/4/2012 | 8:24:16 PM
re: Lucent/Alcatel Rumors Fly With re: to proposed LU - Alcatel deal, how much of their product lines would overlap? I am thinking from ATM switches to DSLAMs to MSPPs to Class 5 switches, there would be huge redundancy.

It doesn't seem that these companies complement each other well. Any thoughts?
Payaya 12/4/2012 | 8:24:14 PM
re: Lucent/Alcatel Rumors Fly Management is absolutely the issue. What would Alcatel gain by owning Lucent ?
gladysnight 12/4/2012 | 8:24:12 PM
re: Lucent/Alcatel Rumors Fly "Management is absolutely the issue. What would Alcatel gain by owning Lucent?" - Payaya.

Absolutely. But, more to the point: what would the shareholders (of either side) gain?


LU shareholders would swap hidebound AT&T lifers for hidebound French civil servants.

AL shareholders would have their comfortable statist existence disturbed by unpleasant market realities in a market (relatively) un-subsidised by captive taxpayers.

On either side, this deal would be a total disaster. Cultural mismatches, massive product overlaps (my quick guesstimate says ~80%), severe marketing problems, dangerous financial condition of both parties, the list goes on . . . .

Marrying two such struggling entities together is a concentration of risk that is not merited by any potential reward.

Hopefully this idea will die the quick death it so richly deserves.
moneyfornothing 12/4/2012 | 8:24:11 PM
re: Lucent/Alcatel Rumors Fly What will Alcatel get? For starters, a wireless infrastructure business that Alcatel is failing to develop on its own. Also a terrestrial optical transport business that well complements Alcatel's undersea business (ALA has struggled to extend its domain to the land but has been unsuccessful). And a real (albeit deteriorating) ATM switch.

THe geographic cost saving potential is strong, as each is spending to build share in the other's backyard.
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