PARIS—Alcatel Inc. and Lucent Technologies Inc. confirmed they are in talks to create a “merger of equals,” a transaction that would result in a single telecom equipment company with a total market capitalization of more than $33 billion.
“We can confirm that Lucent and Alcatel are engaged in discussions about a potential merger of equals that is intended to be priced at market,” the companies said in a statement. “There can be no assurances that any agreement will be reached or that a transaction will be consummated. We will have no further comment until an agreement is reached or the discussions are terminated.”
The two companies attempted a similar transaction five years ago, but talks reportedly stalled because Lucent wasn’t comfortable with Alcatel’s dominant position in the deal. Today, Alcatel’s market capitalization is around $21.2 billion, almost twice that of Lucent’s $12.6 billion cap, which likely would lead the two companies down an Alcatel-buys-Lucent acquisition path rather than the merger-of-equals route. Some in the industry say the two never actually broke off merger talks, and that the new announcement indicates a deal is imminent.
Pressure to consolidate has been growing steadily for telecom equipment vendors. As carriers have consolidated, equipment vendors have been competing for shrinking capex budgets.
“I thought this segment of the industry would have started merging years ago,” said Jeff Kagan, a telecom analyst. “There are just too many separate companies competing. They are all smaller than ever before, and the number of customers they market to are also shrinking due to mergers. Mergers on the network side like we have been seeing will naturally lead to the need for the gear makers to merge.”
Financial analysts also support a Lucent/Alcatel union, as both companies would benefit from the other’s assets.
“In wireless, where the two rarely compete, Alcatel has a solid GSM business in France and emerging markets, while Lucent brings a strong (and very high-margin) CDMA business as well as good technology—but few customers—in W-CDMA,” noted Bear Stearns. “Lucent exited the GSM business a few years ago, which has made it difficult for the company to win 3G upgrade business in W-CDMA (with the exception of Cingular in the U.S.). … Lucent’s W-CDMA design and Alcatel’s GSM customer base enables a combined entity to sell legacy GSM customers a stronger W-CDMA offering, monetize Lucent’s W-CDMA research and development across customers, and potentially increase scale in this business.”
Bear Stearns also points to TD-SCDMA and Internet Protocol Multimedia Subsystem technologies as mutually beneficial for both companies. Alcatel has forayed into TD-SCDMA development though a partnership with Datang Mobile, the leading developer of TD-SCDMA, while Lucent has been investing in IMS and network convergence.
Even so, a combined Alcatel/Lucent venture will not knock L.M. Ericsson off its perch at the top of the wireless equipment-provider market, said UBS Investment Research. Lucent and Alcatel will have to settle for the No. 2 position in the wireless equipment market, but they would likely be No. 1 in the wireline equipment sector, UBS said.
Merger negotiations between Alcatel and Lucent could also feel the heat from political tensions between the French and U.S. governments.
“Despite increased protectionist sentiment, concerns over national security and trade secrets, and several Franco-American differences, we anticipate a combination between Lucent and Alcatel will gain governmental approval,” stated Washington Analysis.
And while some feel that the CEO position of the combined company is Lucent Chief Executive Pat Russo’s for the taking, others say Alcatel’s new corporate operations officer, Mike Quigley, will end up with the top job. Serge Tchuruk, Alcatel’s chief executive, is 68 years old and is likely to retire in the not-too-distant future.
News of the merger talks pushed Lucent’s stock up 19 cents to $3.01 per share, while Alcatel’s stock traded up by just six cents at $15.51 per share.