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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getrealdotcom 12/4/2012 | 8:24:10 PM
re: Lucent/Alcatel Rumors Fly Boy have you hit the nail on the head. Alcatel's purchase of DSC was bad for employees and customers. Alcatel still has some good talent left but it lost a huge amount of experienced people and put many unqualified (some anal)people in decision making rolls. The experienced folks tolerate it until something better comes along. They micro-manage from France and haven't a clue about U.S. market needs or employees needs. They have proven they can buy U.S. companies and destroy them, this deal would be no different except on a larger scale. They also move the cream of development work back to Europe. If Lucent wants to survive they either need to sell off some parts or find a better buyer that appreciates the talent they buy. At Alcatel management is their biggest problem and it will require massive changes to fix (need to clean house on a large scale).
johnjohn 12/4/2012 | 8:24:08 PM
re: Lucent/Alcatel Rumors Fly this merger (acquisition) does not get me excited, especially as a lucent employee. just think of all the redundancy. will a company of that magnitude (200K) be able to execute in a dynamic industry?
gardner 12/4/2012 | 8:24:06 PM
re: Lucent/Alcatel Rumors Fly Whether or not the Lucent/Alcatel deal is a good thing or a bad thing I feel I must respond to some of the silliness being spouted as if it were incontrovertible fact in this forum.

Skeptic tells us:

Alcatel's (unknowing) strategy is usually:

1 - Buy a reasonably good company in north america.

[... litany of nonsense deleted for brevity ]
5 - Shut the north american company down.

Easy to say but I'm a bit skeptical of your "facts" skeptic. Would you care to give some examples of this happening? Which North American companies have been shut down? What technology has been transferred to Europe and then sold to the captive customers? Did you just pull this out of the air or do you have some facts, dates, names to back it up? I didn't think so.

skeptic 12/4/2012 | 8:24:06 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.
Alcatel will destroy each and every one of these
if it buys them. Alcatel, as a company, cannot
function most of the time in a competitive or
leading-edge technology environment. They do best selling to their captive customers and their whole attitude is based on the fact that many of their customers will buy from them regardless of what they have to sell.

In terms of ATM, buying Lucent would give alcatel perhaps three or four internal units selling ATM gear.

Buying Lucent does make some sense. But if it were my call, I would buy Lucent and then shut down the entire current north american operations of alcatel.

Alcatel's (unknowing) strategy is usually:

1 - Buy a reasonably good company in north
2 - Transfer the new companys current
technology to europe where to alcatel's captive
customers, its going to be bleeding edge.
3 - Sell the new companies products, but dont
invest in new products at that company. Keep
the operation going selling the current products
until europe has successfully transfered the
technology and created a matching product.
4 - start selling the european developed products
to the captive customers.
5 - Shut the north american company down.

There are good reasons alcatel is failing in
certain businesses already. And any new company
or product they buy will fail for the same reasons.

Pseudopersonality 12/4/2012 | 8:24:05 PM
re: Lucent/Alcatel Rumors Fly Most people seem to have missed the big picture on this merger concept and have strayed into the emotional side too much.

I don't think that this "deal" is going anywhere IMHO.

The stockholders for LU, especially the ones holding expensive shares, would not accept it and they're probably the majority.

Besides, where is the good old American spirit to overcome adversity and win against all odds instead of giving up?


grass_stain 12/4/2012 | 8:24:04 PM
re: Lucent/Alcatel Rumors Fly Alcatel have a history of damaging US data networking companies they buy with their European micro-management. Don't take my word for it. Take a look at the acquisitions in the last 5 years and see how may new products have come out of them and how many pre-acquisition engineers are left. Alcatel suck the life out of engineers with their need for tight control and abundance of paperwork, lack of knowledge of the data networking business, their lack of knowledge of the US engineer psyche, their lack of vision, and their total focus on the mediocre. Their attitude and actions result in a morale train wreck followed by steep attrition and then unexperienced new hires/inter-company transfers to keep the headcount up. Lucent beware.

At the same time, they are experts in all things telephony, and their A-Team in Europe would walk all over what ever Lucent have in the US. They look after their own.

Alcatel have some very very smart engineers in Europe, and if you see a resume from one of these guys, don't dismiss it.

But they also have managers in Europe. Senior managers with egos on their own little quests who think that 10 year projects are viable in the Internet age. Bureacrasy is king. It doesn't matter if you never produce as long as you have a paper trail to explain where all the money went.

If a project is worth doing, it's worth doing for years until it's cancelled.
rafaelg 12/4/2012 | 8:24:03 PM
re: Lucent/Alcatel Rumors Fly Rather than exagerate and let our opinions grab a foothold, we should look at the facts.
1 LU is hurting for money.
2 D. Hopkins wanted to sell LU as parts. "OH HENRY the Ricky II" wanted to sell LU as a whole or dump 1/2 of it.Guess what appeals to H.S.?
3 Alcatel has lots of $$$$ but no stong presence in the US. An antonym for LU.
6 The FTC eventually would approve the merger after negotiations. If LU and AL begin talks.
7 Alcatel is one of the few that could come up with the cash.(And actually wants to buy LU).
8 The stock would increase in value. (Cash v.s. No cash)
9 They both have the same style of management; ease of transition.

I agree that duplication of product lines is an issue. However, what big company CEO hasn't acquired a startup with duplication of equipment in some areas? It would give both companies a chance for "loosing weight"

lightsoul 12/4/2012 | 8:24:01 PM
re: Lucent/Alcatel Rumors Fly (are)were you part of Alcatel's Xylan or Packet Engines...?
fatchance 12/4/2012 | 8:24:01 PM
re: Lucent/Alcatel Rumors Fly Both LU & Al. are floating ballons on a merger to see if the market cheers or barfs. Problems a' plenty re: product & cultural mix, FTC and EC approvals, Nortel & Seimens rolling over. Of corse if the deal looks dumb enough the competition will remain silent hoping two weak firms tie themselves up trying to get a merger to work before failing (NCR?). LU needs cash but what will Alcatel get and at what price. They'd be paying more than a dot com to get eyeballs. How will customers react?? I think most telcos would be hard pressed to see how they benefit from this merger. My guess is in the end we'll see a parts sale, the whole enchalada doesn't compute.
grass_stain 12/4/2012 | 8:23:59 PM
re: Lucent/Alcatel Rumors Fly Bzzzt. Try again.
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