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Alcatel, Lucent Seal Deal

Alcatel (NYSE: ALA; Paris: CGEP:PA) and Lucent Technologies Inc. (NYSE: LU) announced today (Sunday) that they've agreed to merge, creating a global supplier of fixed and wireless telecom infrastructure with annual revenues of $25 billion, a market capitalization of about $36 billion (based on Friday's closing stock values), and 88,000 employees.

The news comes just nine days after the two firms admitted they were in talks. The deal has been approved by the boards of both companies. (See Reports: Alcatel/Lucent Deal Nears.)

Lucent shareholders will receive 19.52 percent of an ADS (American Depositary Share), representing ordinary shares of Alcatel, for each ordinary share of Lucent they own. Once the deal is completed, current Alcatel shareholders will own 60 percent of the new company and Lucent's shareholders 40 percent. The new company's stock will be traded on the New York Stock Exchange and Euronext Paris.

Lucent CEO Pat Russo will retain that position at the newly formed company, which will be named at a later date. Alcatel's current CEO, Serge "The Merge" Tchuruk, will be non-executive Tchairman. Alcatel's Mike Quigley, who was set to replace Tchuruk as CEO this June, will be chief operating officer. (See Lucent & Alcatel: Quigley or Russo?.)

Each company will appoint six directors to the new company's 14-person board, which will include two "new independent European directors to be mutually agreed upon." The deal is expected to close within six to 12 months, subject to approval from regulators, government bodies, and the two firms' shareholders.

As expected, a separate subsidiary, managed by a board comprising three U.S. citizens, will be formed to deal with Lucent's U.S. government agency business. Concerns had been raised about allowing a non-U.S. company to have any role in Lucent's security-related contracts and Bell Labs developments.

As for Alcatel's sensitive satellite business, Tchuruk is to continue negotiations with French defense firm Thales SA (Paris: TCFP.PA) about a deal that would see Alcatel increase its current 9.5 percent stake in Thales to between 25 percent and 30 percent in return for its satellite subsidiary.

The companies believe the merger will create $1.7 billion in cost savings within three years of the deal closing. Those savings will come from combining multiple corporate functions that will result in a workforce reduction of about 10 percent, or approximately 8,800 jobs.

That could cause some problems for Alcatel's management, reckons Heavy Reading senior analyst Patrick Donegan. "What's surprising is that Alcatel has decided to press ahead with this in the midst of France's current political troubles. Much of these revolve around popular fear of economic globalization, and in particular the fear of French companies and employees having their status undermined by global mergers and acquisitions...

"This deal is undoubtedly the right thing from the perspective of the global telecom sector. The question now is whether it can go through politically. Politics played a part in obstructing these two companies' first attempt at a merger. Six years on, politics could easily undermine it all over again."

The merger will also cost the new company about $1.7 billion in restructuring charges, which will mostly be recorded in the first year. The vendors clearly state that the "transaction is expected to be accretive to earnings per share in the first year post closing with synergies, excluding restructuring charges and amortization of intangible assets."

"A combined Alcatel and Lucent will be global in scale, have clear leadership in the areas that will define next-generation networks, boast one of the largest research and development capabilities focused on communications, and employ the largest and most experienced global services team in the industry," stated Tchuruk in a prepared statement.

Russo added: "The strategic logic driving this transaction is compelling. The communications industry is at the beginning of a significant transformation of network technologies, applications, and services -- one that is projected to enable converged services across service-provider networks, enterprise networks, and an array of personal devices. This presents extraordinary opportunities for our combined company to accelerate its growth.”

Those opportunities will be aided by strong positions in increasingly hot sectors such as IMS (IP Multimedia Subsystem) and IPTV. (See Merger Would Benefit Lucent in IPTV and Lucent Lands BellSouth IMS Deal.)

The vendors say that, once merged, they will have "strong, long-term relationships with every major service provider around the world," and "the largest and most experienced global services and support organization in the industry," with a presence in more than 130 countries worldwide.

In addition to Russo, Tchuruk, and Quigley, other senior executives will include: Lucent's current COO Frank D’Amelio, who will be senior EVP with responsibility for integration and operations; and Alcatel's CFO Jean-Pascal Beaufret and senior VP of human resources Claire Pedini, who will retain their roles at the new company. Other major positions, such as CTO, will be filled at a later date.

With Alcatel and Lucent creating such a powerhouse, other vendors are expected to follow suit as consolidation fever grips the telecom sector. (See Alcatel/Lucent: The Domino Factor, IPOs & M&A: London Gossip, Sources: Lucent, Nokia in Play for Siemens, AT&T Deal Could Spur Cable Buys, and Ma Bell Is Back!)

— Ray Le Maistre, International News Editor, Light Reading

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kneelh 12/5/2012 | 3:59:09 AM
re: Alcatel, Lucent Seal Deal With the strict job security the French enjoy, won't most (or all) the job actions take place this side of the Atlantic?
gbennett 12/5/2012 | 3:59:09 AM
re: Alcatel, Lucent Seal Deal Don't know if anyone covered this in the other message boards, but does ALA get to take on LU's pension liability?
gbennett 12/5/2012 | 3:59:09 AM
re: Alcatel, Lucent Seal Deal Comrades,
The success criteria for this merger seem to be extremely modest. In the first year there'll be about $1.7B in merger costs, balanced by an overall goal of $1.7B savings in job cuts. In my experience, the forcast for merger costs is probably an under-estimate, while the forecast for cost saving is probably an over-estimate.

Considering the enormous effort a merger like this will involve, shouldn't Russo/Tchuruk be talking up the opportunities for incremental revenue?

For example, the combined revenues of LUALA are supposed to be $25B. But what is their forecast for the incremental revenue gain post-merger?

At what point are we allowed to look at the numbers and declare this whole thing to be a success or a failure? I guess by then Serge is sitting on a beach in Mauritius and Patty's running for governer of somewhere or other.

I'm reminded of the 1992 "merger of equals" when Wellfleet (#2 router company at the time behind Cisco) bought Synoptics (#1 hub company at the time, ahead of Cabletron). The day the merger executed the combined company was bigger than Cisco.

But within a year, Bay was struggling. Two more years saw the company sold off to Nortel for scrap value.

Just curious, but does anyone actually have an example of these mega-mergers that's actually worked? By this I mean where the combined company actually became worth more than the sum of its parts?

Cheers,
Geoff
Stevery 12/5/2012 | 3:59:08 AM
re: Alcatel, Lucent Seal Deal Looks to me like this puts serious pressure on others to achieve similar scale. Any entries into the pool of who's next?
farsonic 12/5/2012 | 3:59:08 AM
re: Alcatel, Lucent Seal Deal I think there was somthing like a $7Million bail out clause in that contract, so if Lucent/Alcatel take that option they may either doom Riverstone, or let it go to Ericsson for a Bargin.

I agree that Riverstone would be a stupid product for Alcatel to push when they can provide the 7750/7450 which are far superior products.

I guess they can deep 6 Riverstone and provide the customers that use them with the Alcatel IP/Eth platforms.

farsonic
telecom_guru 12/5/2012 | 3:59:08 AM
re: Alcatel, Lucent Seal Deal Well I'd guess that their 1st order of business will be to shit can the $207M purchase of RSTN.PK junk that LU just bought, given Alcatel has a much superior platform already in large scale deployments (i.e. Timetra boxes). Maybe they'll take a few crumbs from Ericsson now just to save their asses? Talk about not coordinating acquisition startegies....duh!
MorningWd 12/5/2012 | 3:59:07 AM
re: Alcatel, Lucent Seal Deal I'm betting Nortel and Ericsson, with Ericsson in control.
litedope 12/5/2012 | 3:59:07 AM
re: Alcatel, Lucent Seal Deal Moto + Nortel + Juniper
rickaty 12/5/2012 | 3:59:06 AM
re: Alcatel, Lucent Seal Deal A very likely merger will be the combined ALA+LU buying Juniper. Its a perfect fit product-wise and the soon to be LU+ALA combo is the first telecom company big enough to swallow Juniper's market cap.

I also think Ericcson or Nokia might still make a play for Lucent. It's mot very likely with the 500 million dollar breakup fee in the ALA+LU deal, but it isn't out of the question.
Physical_Layer 12/5/2012 | 3:59:06 AM
re: Alcatel, Lucent Seal Deal What about Nokia doing something? Nokia is #2 in wireless behind Ericsson but doesn't really have ANY respect in IMS yet (from what I can tell) and doesn't seem to have done anything to get into the whole wireline/wireless convergence theme.

Do they get out of infrastructure and just focus on handsets, or do they make a move to follow in the steps of Ericsson? Is Nortel a good fit for Nokia?

Just some thoughts.

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