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Alcatel/Lucent: First Reactions

So the megamerger of Alcatel (NYSE: ALA; Paris: CGEP:PA) and Lucent Technologies Inc. (NYSE: LU) is on. (See Alcatel, Lucent Seal Deal.)

And it's a deal that has given Alcatel's share price a healthy boost of €0.76, nearly 6 percent, to €13.53 this morning on the Euronext Paris exchange, giving the French vendor a market capitalization of €19.3 billion ($23.25 billion). That's the stock's highest price of 2006 so far.

Why? Well, the merger creates a telecom powerhouse, and the deal doesn't involve any questionable premium over Lucent's current market value.

As the two companies initially stated when they announced merger talks late last month, it's a deal done at current market valuations. Alcatel's offer of 19.52 percent of an ADS (American Depositary Share) per Lucent share values the U.S. vendor's shares at $3.00 each, making it worth $13.4 billion. That's just below Friday's closing price of $3.05, which values Lucent at $13.63 billion.

So Alcatel investors clearly believe this is a positive deal, but what do analysts think?

Teething troubles
Graham Finnie, senior analyst at Heavy Reading, believes the two companies will have to be very disciplined to make the merger work.

"Alcatel is clearly the number one partner here," says Finnie, but because the deal is being presented as a merger of equals, "it’s easy to see the potential for a prolonged period of internal in-fighting that will damage the company’s ability to deal with the threat from emerging competitors as well as established competitors."

Then there are the potential geopolitical issues. "Despite the merger of equals language, this will be a French company, based in Paris. How will that go down in the U.S.? Where will the job losses be? Will this be seen as a straightforward takeover of Lucent by Alcatel?"

In addition, the two companies have "given a strong impression that this is mainly defensive, aimed at cutting costs rather than finding new sources of revenue. It's hard to see how this merger will grow the company’s revenues overall." But Finnie sees some positives, too: "From a geographical perspective there are some obvious benefits, especially in the wireless sector where there isn’t much overlap in terms of geography or technology. In IMS [IP Multimedia Subsystem], Lucent also brings its existing wins and strong market position in the U.S., while Lucent Worldwide Services is also a gain from Alcatel’s point of view, since the French firm doesn’t have much of a proposition in professional services."

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digits 12/5/2012 | 3:59:02 AM
re: Alcatel/Lucent: First Reactions In pre-market trading this morning Lucent's stock is up 5 cents, about 1.6%, to $3.10.
lighten up!! 12/5/2012 | 3:59:01 AM
re: Alcatel/Lucent: First Reactions Do we really need Pat to lead the new company???
jepovic 12/5/2012 | 3:59:00 AM
re: Alcatel/Lucent: First Reactions She won't be leading the new company, silly. She's an American woman trying to lead a French company, in Paris, with a French president looking over her shoulder. She will be a cute little puppet who can give advise on which Lu products to cut first, and perhaps do some presentations.

No way the French would ever let her actually run the company, why would they? This is a way of getting the deal through Lucent's management and American politics...
^Eagle^ 12/5/2012 | 3:58:59 AM
re: Alcatel/Lucent: First Reactions I read one of the analysts state that some of the operational savings of 1.4B would come from increased purchasing power.

This is almost completely bunk. Once orders reach sufficient size, increasing the size of the order will only lead to marginal or even ZERO cost reducts per unit.

LU and ALA purchasing power is already at the nadir of the industry. Even a combined company will likely NOT get lower costs in any component or piece of hardware.

Suppliers have to make a profit to stay alive. Most suppliers are already at the thinnest possible margins and even if the volume of... oh lets say ROADM's, or microprocessors or network framing chips or detectors were to go up as part of the combined company, the odds of getting a lower price from vendors is not too good. Any increased discounts would be minimal at best.

For ease of managing long term supply contracts there is synergy. But savings from increased buying power? Get real. This only applies if you are small growing to medium or medium growing to large. Too very large entities merging to become behemouth will not yeild much additional savings.

My belief is that all the savings will come from fired employees, shuttered and sold off facilities, sold off operations, sold off redundant parts of the original companies. Read... all the synergies come from real estate and people loosing their jobs.

sailboat
Stevery 12/5/2012 | 3:58:58 AM
re: Alcatel/Lucent: First Reactions I read one of the analysts state that some of the operational savings of 1.4B would come from increased purchasing power.

This is almost completely bunk.


In a normal situation, I would disagree with you. However, comparing the CSCO people at GSM to LU's counterpart, you may have a point.

Also (in a normal situation), I would say that this merger + one other would start to drive the component guys to merge or die. It may happen anyway.
"Ill" Duce 12/5/2012 | 3:58:19 AM
re: Alcatel/Lucent: First Reactions "My belief is that all the savings will come from fired employees, shuttered and sold off facilities, sold off operations, sold off redundant parts of the original companies. Read... all the synergies come from real estate and people loosing their jobs."

Sailboat hits the layoff nail squarely on the head. Synergism is just another word for "sucking on a larger scale." Contrary to what some believe there are product overlaps between the two and products in the field that failed to meet customer expectations. This is the perfect time to jettison the results of a few years of poor decisions, and the associated executives, and blame it on the merger. My guess is that most of the operations will end up in NJ. The bulk of Alcatel's real estate in Texas was sold off when the bubble burst (coincidence?) so there isn't as much left to sell. It's also my guess that much of the layoffs will come from the Alcatel US side. That's a no-brainer.
If French teens riot because of job changes, think what their parents would do. They could take down the global market for really stinky and delicious cheese. Mon Dieu!
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