Alcatel/Lucent: The Domino Factor

With Alcatel (NYSE: ALA; Paris: CGEP:PA) and Lucent Technologies Inc. (NYSE: LU) admitting to merger talks, questions arise about the implications of such a marriage on the rest of the telecom equipment segment. (See Lucent, Alcatel Rekindle the Flame and Lucent & Alcatel: Quigley or Russo?)

A combined Alcatel/Lucent would generate revenues of more than $25 billion a year, at current rates, and be a formidable competitor in just about every telecom segment, from the edge of the network all the way to a next-generation core. (See Alcatel Pays Up and Lucent Cuts 2006 Outlook.)

That includes mobile infrastructure, where Lucent is the market leader in CDMA equipment and Alcatel has built a position in GSM/UMTS. Combining the two would make for a major global player, says Patrick Donegan, senior analyst at Heavy Reading.

"From a wireless perspective, a combined Lucent and Alcatel would be a clear global number two behind Ericsson. It would be number one in CDMA and be approaching a 10 percent share in GSM, with strong momentum in the key emerging market opportunities. In W-CDMA it would have strong account presence in Cingular Wireless and Orange SA (London/Paris: OGE) as well as good prospects in China, Russia, and India. And it would also have a presence in WiMax," says Donegan. (See Lucent, Cingular Prep HSDPA and Alcatel Supplies Orange).

So what sort of impact might such a combination have on the equipment sector? Donegan reckons it could light a fire under some of the other vendors.

“Once one of these big deals is done, that could trigger others to happen a lot more quickly than is generally thought. The case for Nortel Networks Ltd. and Siemens Communications Group combining remains strong," says the analyst. (See Sources: Lucent, Nokia in Play for Siemens.)

Donegan believes vendor combinations that are strong in fixed and wireless, and which have significant footholds in European and North American carriers, make a lot of sense. And that could leave some of the other vendors vulnerable.

"As wireline and wireless networks begin converging, perhaps the greatest uncertainty surrounds Nokia Corp. (NYSE: NOK) and Motorola Inc. (NYSE: MOT) and whether they will look to commit further to the infrastructure market or else exit altogether,” he adds.

The list of companies affected by an Alcatel/Lucent combo doesn't stop there, with Cisco Systems Inc. (Nasdaq: CSCO), Ericsson AB (Nasdaq: ERIC), and Juniper Networks Inc. (NYSE: JNPR) all likely to consider their strengths and weaknesses in a new vendor world, while Chinese companies Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) could also come into play -- though few industry watchers feel Huawei is ready to open itself to greater financial scrutiny at present.

And there's one growth area that a combined Alcatel/Lucent might look closely at in terms of its future growth. Home networking, the equipment that sits in the broadband user's home, has grown in importance for carriers and vendors alike in the past 12 to 18 months, though Alcatel has made an investment in one of the home gateway sector's leading lights, 2Wire Inc. . (See Alcatel Buys Into 2Wire, Cisco to Acquire Scientific-Atlanta, BB Forum: Gateway Goals for Carriers, and IP Video: In the House.)

— Ray Le Maistre, International News Editor, Light Reading

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