PARIS—As Alcatel Inc.’s shareholders get set to vote on the issue Sept. 7, analyst opinions run the gamut on the infrastructure “merger of the season” between Alcatel and Lucent Technologies Inc.
According to Joe Chaisson, analyst at Susquehanna Financial Group, “it has been a long, arduous year for (Lucent chief) Pat Russo and company.”
Chaisson further noted that with Lucent’s stock price having dropped roughly 30 percent within the past 12 months, “part of us says we should just leave these weary folks alone and let the Alcatel merger close peacefully; but regrettably, 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.”
Chaisson said the deal may be a case of “take the money and run” for Lucent shareholders.
“Some of our peers have written recently about Lucent’s retiree obligations as the major impediment to the deal. While we agree these are clearly detrimental factors (with the healthcare arguably uglier than the pension), we view them as secondary to the primary question of how does Alcatel benefit from the Lucent product portfolio? Our contention is that these retiree obligations were likely well understood by Alcatel before the deal was announced, as they are reasonably well bounded by a specific group of financial assets and explicit assumptions around projected liabilities, lessening the potential for surprise.
“Rather, we contend that the most recent, and arguably most compelling evidence against this deal is the trend emerging in the CDMA infrastructure market. CDMA is the Lucent crown jewel, accounting for roughly 45 percent of the company’s revenue and 70 percent-plus of the company’s operating profits, and is clearly the Lucent product asset of the most financial value to Alcatel. Pat Russo’s (third quarter) earnings comments notwithstanding, however, the facts do indeed suggest the long-term outlook for CDMA is quietly and quickly growing cloudy. Moreover, with significant overlap across the two vendors’ wireline product portfolios, and the Alcatel products universally the stronger of the two, the question of what exactly Alcatel is getting from this deal grows larger each day.”
However, Institutional Shareholder Services Inc. issued a report recommending that shareholders approve the $10.4 billion deal because of “compelling strategic rationale, attractive synergies and conservation valuation.”
Since April, when the agreement was announced, both companies have seen their stock prices drop. And after Lucent’s dismal third-quarter results were announced, complete with a 79 percent free-fall in profits due to lower sales of wireless network gear in North America, investors and analysts alike began murmuring about Alcatel overpaying for Lucent.
Nevertheless, ISS said in its report, “We believe the proposed transaction warrants Lucent and Alcatel shareholder support.”
