Could CDMA Hurt Alcatel Lucent?

Another analyst has come out swinging against the merger of Alcatel (NYSE: ALA; Paris: CGEP:PA) and Lucent Technologies Inc. (NYSE: LU), this time criticizing the companies' combined product lineup and the potential decline of Lucent's CDMA franchise.

Analyst Joe Chiasson of Susquehanna Financial Group voiced his concerns in a note issued this morning.

"The evidence that this is a questionable deal for Alcatel shareholders continues to mount, and we are compelled to speak for them even if they have not (yet?) spoken for themselves," Chiasson writes. For Lucent shareholders, though, "this is truly a case of 'Take the Money and Run,' " he adds.

Alcatel's shareholders will vote on the merger Sept. 7 -- the one-year anniversary of Chiasson's initiation of Lucent coverage with a Negative rating, which he hasn't changed.

So far, there's been no sign that Alcatel shareholders plan to vote against the merger, which was announced in April, and the majority of analysts seem to like the deal for both sides. (See Alcatel, Lucent Seal Deal.)

Some of the early concerns about the deal are resurfacing, however. Analyst Per Lindberg of Dresdner Kleinwort released a series of short notes last week opining that Alcatel shareholders should be throwing rotten fruit at the deal, or at least complaining about the price Lucent is commanding. (See Analyst: Alcatel Should Rethink Things.)

Lindberg's concerns included Lucent's pension fund. But Chiasson's thoughts strike more directly to the heart of the merger: What, he asks, does Alcatel get out of Lucent's products?

"We contend that the most recent, and arguably most compelling evidence against this deal is the trend emerging in the CDMA infrastructure market," he writes. "The facts do indeed suggest the long-term outlook for CDMA is quietly and quickly growing cloudy."

CDMA accounts for 45 percent of Lucent's revenues and 70 percent of its operating profits, according to Chiasson -- yet CDMA is on the decline. Of the top 20 CDMA-based service providers, 12 are dabbling with other radio access network technologies, by Chiasson's count. That includes Sprint Corp. (NYSE: S), which recently announced an ambitious WiMax plan. (See Sprint Goes WiMax.)

A year ago, Chiasson believed Lucent's CDMA business would grow 8 to 9 percent per year. "We now believe a 5 percent year-over-year decline would be a far more realistic assessment," he writes (including the emphasis).

Lucent offered a different opinion in its July earnings call, with CEO Pat Russo saying the CDMA market could remain strong. She noted CDMA2000 1xEV-DO Rev A upgrades happening at Verizon Wireless and, uh, Sprint Nextel -- which, in all fairness, did beef up its Rev A plans after the Lucent call. (See Lucent's Russo: Don't Panic! and Sprint Speeds Rev A Rollout.)

Beyond CDMA, Chiasson is concerned about product overlap: "The elimination of 'duplicate' products often introduces uncertainty into the associated revenue stream, such that forecasted synergies are often not what they seem."

Chiasson runs down a few areas where product cancellations look likely but could make for unhappy customers. Both companies have WCDMA platforms, suggesting either Cingular Wireless or Orange SA (London/Paris: OGE), their two main customers, will have to change. (See Alcatel, Lucent Face 3G Decision.) In optical, Alcatel could cancel Lucent's DMX multiservice provisioning platform, but that would risk the wrath of customer BellSouth Corp. (NYSE: BLS)

Other affected areas include the access market, where Lucent's Stinger DSLAM would appear to lose out to Alcatel's 7302 ISAM, and VOIP, where both companies have softswitches.

In a written statement, an Alcatel spokesman says the companies believe they've got a good fit: "From the day the merger was announced, we have been consistent in our assertion that we feel the two companies share the same vision and excellent geographic, product portfolio and customer synergies."

Chiasson believes the Alcatel Lucent deal will get done, "if for no other reason than Lucent's need for this deal is obviously at its highest point." But chalk him up as another voice suggesting a repricing of the deal. Chiasson thinks a ratio of 0.155 to 0.167 Alcatel shares to Lucent shares would be proper, as opposed to the 0.1952 Alcatel/Lucent ratio up for vote.

"We've been very very bullish that we will not reprice the deal," an Alcatel spokesman tells Light Reading, adding that Alcatel has taken Lucent's short-term risks into account.

The merger agreement includes no vehicle for changing the exchange ratio, by the way, so it appears the price can't move unless Alcatel shareholders reject the deal.

— Craig Matsumoto, Senior Editor, Light Reading

Pete Baldwin 12/5/2012 | 3:43:46 AM
re: Could CDMA Hurt Alcatel Lucent? With softswitches, Lucent is a nonentity next to Alcatel; the report notes this. It's more the fact that all this IMS blossoming at Lucent has been built around Lucent products, presumably, rather than Alcatel's.

Given the vagueness of IMS, this might not be that big a deal. Still, it's one more thing to worry about, and potentially a case where a product "synergy" fails to materialize as promised. We'll see.

VOIP was a minor point in the report; it's mainly the CDMA stuff that Chiasson hammers home.

But you're right, jasanz, that things aren't black and white -- particularly in a deal as complex as this one. Always good to be reminded of that.
jasanz 12/5/2012 | 3:43:46 AM
re: Could CDMA Hurt Alcatel Lucent? I would like to know what softswitch LU has that, according to the report, competes with the equivalent product from ALA. The Plexus 9000 is not very good competitor in Europe (not ETSI ISUP variants) but it does a good job in the USA...

Regarding those "bad news" about the merge, I believe that some people like to focus just on the disadvantages (that every merge has) instead of the strong points of the new company.

While I am not sure if an American company will work fine with a French company, I believe that ALA-LU will be very strong in Europe AND USA. (Who really knows LU in Europe? How strong is ALA in USA?).

There are several products that will overlap, and I agree with the report. But I think that there are many other products who do not overlap and the best of breed of each will probably give strong competition to the industry. For example, ALA is very strong on DSLAMs, Timetra routers, IP PBX for enterprises. LU has a strong IMS story and great Professional Services...

There is nothing black and white, dont you think?
jepovic 12/5/2012 | 3:43:46 AM
re: Could CDMA Hurt Alcatel Lucent? No, doubt, LU share price would've fallen by at least 20, perhaps 40-50%, without the merger. The CDMA situation has become dramatically worsened since the merger was announced. I'm sure Alcatel has more insight that the analysts and the stock market, but I doubt they anticipated this.
Maverick1 12/5/2012 | 3:43:46 AM
re: Could CDMA Hurt Alcatel Lucent? 1. Lucent is a shell of a company producing lower and lower revenues, and being misled internally from listless, out of touch hangers-on managers. The recent $300 million shortfall is just the continuance of the ongoing demise. No one should have been surprised. Real planning is non-existent. Lucent is not worth it to Alcatel shareholders for just the Verizon business.
2. The only successful exit for Lucent is a buyout. It is the only thing that will save face for the mismanagers, and save their jobs for a little while longer. The alternative is reporting continued steep declines, mitigated only by more layoffs. After 6 years/100K+ people of layoffs, They do NOT have the people or expertise to ADD VALUE to customers with market leading product. 3.It is, and has been, all about saving senior level jobs with political incumbents at Lucent for some time, NOT making product or revenue. How else can you justify INNUMERABLE DIRECTORS AND VP's in name only (no or very few people working for them, no real tasks) making big bucks they know they can't replicate elsewhere. To say nothing about the product, project and other managers with no products or no new development to manage. Why are they still there? They should leave out of embarrassment! Should feel like they are committing grand larceny! They have been and are protecting their own and will continue to do so in North America becoming a boat anchor to Alcatel shareholders. Why is Alcatel bailing them out?
MorningWd 12/5/2012 | 3:43:45 AM
re: Could CDMA Hurt Alcatel Lucent? I don't see why ALA would want to do this "merger of equals," but one thing to consider is the LU relationships in some of their accounts. This article hammers in on CDMA and mentions the interest of Sprint / Nextel in WiMAX. I'm sure that they wouldn't do a deal over a single customer, but going into Sprint with ALA's WiMAX solution would probably be a whole lot easier with LU along. Perhaps there are many similar opportunties along other product lines to try to make this rock float.

jes 12/5/2012 | 3:43:43 AM
re: Could CDMA Hurt Alcatel Lucent? Its intresting to see DMX is mentioned in the article. DMX has been successful in the north american market competing against the Flashwaves and the Cisco ONS. ALA has a very strong optical line of products which has been largely successful in Europe.. so i would say the ALA-Lucent will keep both of these product lines.. i doubt they would kill the DMX.
jlcsig 12/5/2012 | 3:43:43 AM
re: Could CDMA Hurt Alcatel Lucent? jes
thats precisley the delimma they face

you cant realize all the forecasted opex cuts & synergies if you are running two product platforms that essentially do the same thing and compete in the same market segement(MSPP)

yet if they cut DMX to save opex, surely some of those north american customers will at least look elsewhere, starting with fuji
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