Friday May 18, 2:10 pm Eastern Time
Sources: Alcatel in Talks with Lucent
By Jessica Hall/Ben Klayman
PHILADELPHIA/CHICAGO (Reuters) - French telecommunications equipment maker
Alcatel is in talks to acquire struggling U.S. rival Lucent Technologies Inc. to form a global
powerhouse serving many of the world's largest and most lucrative telecommunications
customers, sources familiar with the situation said on Friday.
A decision may be reached ``sooner rather than later,'' the sources said. Negotiations,
which have been held on and off over the past month, may heat up next week, and a deal
could be forged by June, they said.
One investment banker, who declined to be named, said Lucent has also talked to other
potential suitors.
Alcatel and Lucent declined to comment.
If the two companies agree on a deal, Alcatel would pay less than a 20 percent premium
over Lucent's (NYSE:LU - news) current stock price, the sources said. Lucent has a
market capitalization of about $34 billion, while Alcatel's is about 43.6 billion euros, or
$38.3 billion.
A deal would combine Lucent's strength in North America with Alcatel's power in Europe.
Alcatel also would gain Lucent's renowned Bell Labs research and development arm, and
its expertise in CDMA (code division multiple access) wireless technology, switching,
transmission, and core network products. Alcatel, meanwhile, has strength in edge network
products, optics, and digital subscriber line (DSL) technology.
``It makes sense for both, but it doesn't make a great deal of sense. They would both get
something out of it, but it wouldn't be a compelling deal,'' said Dresdner Kleinwort
Wasserstein analyst Ariane Mahler.
Shares of Lucent gained 26 cents, or 2.65 percent, to $10.07 in heavy trading on the New
York Stock Exchange. Alcatel stock was down 6.33 percent at 33.72 euros,
underperforming the DJ Stoxx technology index (.SX8P), which was up 1.68 percent at the
time.
Alcatel bond yields also widened by around 10 basis points on worries that a transatlantic combination with Lucent could lead
to a credit rating downgrade.
ALCATEL'S NORTH AMERICAN POWER WOULD SURGE
Alcatel has worked to shed disparate businesses that ranged from vineyards to nuclear power, and strengthen its presence in
the U.S., where it gets about 20 percent of its sales, analysts said.
It divested more than $10 billion in European assets to help fund an aggressive $17 billion push into North America, including
its acquisitions of optical equipment company DSC Communications in 1998 and switch maker Newbridge Networks last
year.
``Alcatel has always wanted a tremendous presence in the United States and that's why they've done their series of
acquisitions that they've done over the years, but none of them have given them the No. 1, 2, or 3 total systems company
clout in the U.S. With this, boom, they'd be there,'' said one fund manager, who declined to be named.
The negotiations, which grew out of Alcatel's interest in Lucent's fiber-optic cable business, comes at a time when the industry
is struggling with a slowdown in equipment spending by telecommunications carriers.
LUCENT MUST WEIGH QUICK FIX VS. RECOVERY
Those pressures have complicated Lucent's own internal
problems.
Lucent buckled under several product development missteps,
management turnover, and massive losses. Its stock has fallen about 82.5 percent over the past year and has underperformed
the Standard & Poor's 500 index by about 80 percent. Credit rating agencies have warned they may cut Lucent's rating to
junk status
``I'm not surprised that the Lucent board would be willing to entertain offers at only a slight premium to get the monkey off
their back. This is a huge turnaround project and they really need an injection of management and stability,'' said Tim
Ghriskey, senior portfolio manager with mutual fund company Dreyfus Corp.
``Europeans tend to not worry so much about the length of time it takes to turn something around. They're much longer-term
than the U.S. market has become,'' Ghriskey said.
Industry sources told Reuters last month that the initial talks between Alcatel and Lucent faltered because of differences on
valuation and Lucent's apprehension about getting easy merger clearance from authorities in Washington.
``The question is whether or not Lucent management wants to be short-term oriented and respond to people upset by the
share price, or if they believe in their brands and believe they can turn the ship around and really return true value to
shareholders,'' said Richard Steinberg, president of Steinberg Global Asset Management, a Florida asset management firm.
``It's always easy to have a quick fix,'' he said. ``The question is, is that really what's best for the employees, the shareholders,
and for the customers of Lucent? I don't think it is.''
Steinberg said he would prefer that Lucent continue to shed noncore units and focus on its strengths. ``Figure out what you're
good at and what you're not and run the business. Don't sell it to the French for a song and a dance,'' he said.
CULTURE CLASHES, COSTS, AND COMPLICATIONS
Lucent's financial woes and aging technology, as well as potential culture clashes, could cause substantial headaches for
Alcatel. The deal could mirror some of the problems seen at DaimlerChrysler AG (NYSE:DCX - news), the troubled merger
of German and U.S. carmakers, analysts said.
``It would be a major distraction to Alcatel management to make this integration work because it would require more layoffs,
a lot of products that would need to be canceled, and getting customer buy-in on product cancellations are not always easy,''
UBS Warburg analyst Nikos Theodosopoulos.
Analysts and portfolio managers have said Lucent could cut as many as 20,000 more jobs, or 22 percent of its work force
remaining after the completion of the 15 percent reduction announced in January.
``The market does not like this deal, if it does happen, and is putting masses of pressure on Alcatel shares,'' said Simon Kirton
of Aberdeen Asset Management. ``The market thinks it will be difficult to integrate the two companies.''
Alcatel also has its own problems. On Wednesday, its shares tumbled after the company announced that a key client,
Canada's 360networks (Toronto:TSX.TO - news; NasdaqNM:TSIX - news), had delayed two major contracts.
Standard & Poor's ratings agency on Friday placed Alcatel on CreditWatch negative, citing suspension of the contracts. The
agency also warned an acquisition of Lucent could have negative implications for Alcatel's credit rating.
Last month, Alcatel scaled back its outlook for this year and said it would outsource mobile handset production to cope with
slowing growth.
``Our advice would be that they should sort themselves out before they embark on trying to buy something almost as big as
themselves,'' said a Paris-based trader.
Analysts at ABN Amro said a combination would dilute Alcatel earnings per share by as much as 75 percent in 2002 before
any synergies. Potential cost cuts in research and development, manufacturing, and marketing could produce annual savings of
$1.5 billion to $2.0 billion.
Sources: Alcatel in Talks with Lucent
By Jessica Hall/Ben Klayman
PHILADELPHIA/CHICAGO (Reuters) - French telecommunications equipment maker
Alcatel is in talks to acquire struggling U.S. rival Lucent Technologies Inc. to form a global
powerhouse serving many of the world's largest and most lucrative telecommunications
customers, sources familiar with the situation said on Friday.
A decision may be reached ``sooner rather than later,'' the sources said. Negotiations,
which have been held on and off over the past month, may heat up next week, and a deal
could be forged by June, they said.
One investment banker, who declined to be named, said Lucent has also talked to other
potential suitors.
Alcatel and Lucent declined to comment.
If the two companies agree on a deal, Alcatel would pay less than a 20 percent premium
over Lucent's (NYSE:LU - news) current stock price, the sources said. Lucent has a
market capitalization of about $34 billion, while Alcatel's is about 43.6 billion euros, or
$38.3 billion.
A deal would combine Lucent's strength in North America with Alcatel's power in Europe.
Alcatel also would gain Lucent's renowned Bell Labs research and development arm, and
its expertise in CDMA (code division multiple access) wireless technology, switching,
transmission, and core network products. Alcatel, meanwhile, has strength in edge network
products, optics, and digital subscriber line (DSL) technology.
``It makes sense for both, but it doesn't make a great deal of sense. They would both get
something out of it, but it wouldn't be a compelling deal,'' said Dresdner Kleinwort
Wasserstein analyst Ariane Mahler.
Shares of Lucent gained 26 cents, or 2.65 percent, to $10.07 in heavy trading on the New
York Stock Exchange. Alcatel stock was down 6.33 percent at 33.72 euros,
underperforming the DJ Stoxx technology index (.SX8P), which was up 1.68 percent at the
time.
Alcatel bond yields also widened by around 10 basis points on worries that a transatlantic combination with Lucent could lead
to a credit rating downgrade.
ALCATEL'S NORTH AMERICAN POWER WOULD SURGE
Alcatel has worked to shed disparate businesses that ranged from vineyards to nuclear power, and strengthen its presence in
the U.S., where it gets about 20 percent of its sales, analysts said.
It divested more than $10 billion in European assets to help fund an aggressive $17 billion push into North America, including
its acquisitions of optical equipment company DSC Communications in 1998 and switch maker Newbridge Networks last
year.
``Alcatel has always wanted a tremendous presence in the United States and that's why they've done their series of
acquisitions that they've done over the years, but none of them have given them the No. 1, 2, or 3 total systems company
clout in the U.S. With this, boom, they'd be there,'' said one fund manager, who declined to be named.
The negotiations, which grew out of Alcatel's interest in Lucent's fiber-optic cable business, comes at a time when the industry
is struggling with a slowdown in equipment spending by telecommunications carriers.
LUCENT MUST WEIGH QUICK FIX VS. RECOVERY
Those pressures have complicated Lucent's own internal
problems.
Lucent buckled under several product development missteps,
management turnover, and massive losses. Its stock has fallen about 82.5 percent over the past year and has underperformed
the Standard & Poor's 500 index by about 80 percent. Credit rating agencies have warned they may cut Lucent's rating to
junk status
``I'm not surprised that the Lucent board would be willing to entertain offers at only a slight premium to get the monkey off
their back. This is a huge turnaround project and they really need an injection of management and stability,'' said Tim
Ghriskey, senior portfolio manager with mutual fund company Dreyfus Corp.
``Europeans tend to not worry so much about the length of time it takes to turn something around. They're much longer-term
than the U.S. market has become,'' Ghriskey said.
Industry sources told Reuters last month that the initial talks between Alcatel and Lucent faltered because of differences on
valuation and Lucent's apprehension about getting easy merger clearance from authorities in Washington.
``The question is whether or not Lucent management wants to be short-term oriented and respond to people upset by the
share price, or if they believe in their brands and believe they can turn the ship around and really return true value to
shareholders,'' said Richard Steinberg, president of Steinberg Global Asset Management, a Florida asset management firm.
``It's always easy to have a quick fix,'' he said. ``The question is, is that really what's best for the employees, the shareholders,
and for the customers of Lucent? I don't think it is.''
Steinberg said he would prefer that Lucent continue to shed noncore units and focus on its strengths. ``Figure out what you're
good at and what you're not and run the business. Don't sell it to the French for a song and a dance,'' he said.
CULTURE CLASHES, COSTS, AND COMPLICATIONS
Lucent's financial woes and aging technology, as well as potential culture clashes, could cause substantial headaches for
Alcatel. The deal could mirror some of the problems seen at DaimlerChrysler AG (NYSE:DCX - news), the troubled merger
of German and U.S. carmakers, analysts said.
``It would be a major distraction to Alcatel management to make this integration work because it would require more layoffs,
a lot of products that would need to be canceled, and getting customer buy-in on product cancellations are not always easy,''
UBS Warburg analyst Nikos Theodosopoulos.
Analysts and portfolio managers have said Lucent could cut as many as 20,000 more jobs, or 22 percent of its work force
remaining after the completion of the 15 percent reduction announced in January.
``The market does not like this deal, if it does happen, and is putting masses of pressure on Alcatel shares,'' said Simon Kirton
of Aberdeen Asset Management. ``The market thinks it will be difficult to integrate the two companies.''
Alcatel also has its own problems. On Wednesday, its shares tumbled after the company announced that a key client,
Canada's 360networks (Toronto:TSX.TO - news; NasdaqNM:TSIX - news), had delayed two major contracts.
Standard & Poor's ratings agency on Friday placed Alcatel on CreditWatch negative, citing suspension of the contracts. The
agency also warned an acquisition of Lucent could have negative implications for Alcatel's credit rating.
Last month, Alcatel scaled back its outlook for this year and said it would outsource mobile handset production to cope with
slowing growth.
``Our advice would be that they should sort themselves out before they embark on trying to buy something almost as big as
themselves,'' said a Paris-based trader.
Analysts at ABN Amro said a combination would dilute Alcatel earnings per share by as much as 75 percent in 2002 before
any synergies. Potential cost cuts in research and development, manufacturing, and marketing could produce annual savings of
$1.5 billion to $2.0 billion.
