The Merger That Wasn't
Future for Lucent, Alcatel still cloudy after talks fail
By Jeanie Stokes
from the June 4, 2001 issue of Broadband Week
In the wake of their failed negotiations to merge, the biggest question remaining for Lucent Technologies and Alcatel may be, "What next?"
The two telecom equipment giants both face, as they had before they began talking months ago, weakening and the apparent necessity to dramatically restructure their businesses in order to remain competitive--or in Lucent's case, to survive.
The companies last week tersely announced termination of their merger talks after failing to reach any agreements. Pundits say critical disagreements ranged from who would control the combined companies to concerns over possible regulatory and financial hurdles.
At the same time, there were no immediate answers about what Lucent and Alcatel would do to bolster their businesses; Alcatel didn't even address whether it still wanted to negotiate to buy Lucent's fiber and cable business, the purported catalyst for the full-bore merger talks.
Questions about why Paris-based Alcatel was pursuing problem-ridden Lucent had begun arising as reports began surfacing in April that the two were talking merger.
Besides shopping its fiber operations around, the Murray Hill, N.J.-based Lucent already has spun off its prosperous enterprise networks business as Avaya Communication and is preparing to spin off its microelectronics unit, Agere Systems, to help reduce the parent company's crushing debt load.
And Lucent was not the only one with problems. Shortly after calling off their talks, Alcatel warned it would report a second quarter net loss of $2.56 billion. The French company blamed poor market conditions and writedowns in conjunction with the expected second-quarter IPO of its cables and components unit Nexans, and the restructuring of its cellular handset and enterprise businesses.
Alcatel may have entered the merger talks with Lucent because "it knew that its core business over the next 18 months would go through much pain due" because of lower carrier capital spending and the second-tier positioning of much of its business areas, wrote Merrill Lynch analyst Adnaan Ahmad. The analyst lowered earnings per share forecasts for 2001 by 40 percent to 81 cents and for 2002 by 20 percent to 28 cents due to the outlook for slower spending by Alcatel's carrier customers.
The combination would have given Alcatel a bigger foothold in the United States, which accounts for 21.6 percent of its worldwide sales that totaled $6.33 billion in the first quarter. Buying Lucent also would have given Alcatel more than a third of the worldwide market share for Internet infrastructure, broadband and dial-access and frame-relay switching equipment. Alcatel already dominates the $10 billion subsea transport market, with 41 percent of sales, and has a commanding 35 percent of the $3.2 billion market for digital subscriber line equipment.
Although the two companies say they won't have anything further to say about their discussions, it appears they heard concerns expressed by shareholders of the two companies. Lucent's stock, which has lost 87 percent of its value during the past 12 months, fell more than 23 percent during May. Alcatel's American Depositary Receipts declined almost 17 percent.
Analysts had mixed views of the decision to call off the acquisition discussions. Lazard Freres & Co., analyst Truc Do cited Lucent's improvements in its optical, wireless and circuit switch businesses, as he raised his rating to "buy" from "outperform" and boosted the stock's target price to $14 from $12.
"We are encouraged that Lucent has ended merger talk with Alcatel," Do says. "At this point, we would rather see management implementing further cost cutting measures than going through a merger."
"We believe the upside in standalone Lucent remains extremely limited at this point," says Bank of America Securities' Christopher Crespi. He downgraded Lucent's stock to "buy" from "strong buy" as he revised earnings and revenue estimates for eight other telecom equipment and data networking stocks.
The saga is likely to continue. Besides having to meet current business challenges, Lucent now is a company in play. Possible suitors reportedly include Swedish telecom networks giant Ericsson AB, which might covet Lucent's CDMA-based wireless networks business.
Why did the Alcatel talks fail? Investors may have been concerned that a stock swap acquisition of Lucent, which reportedly had a value around $23 billion, included no premium for shareholders and would have left them with foreign shares some might not want to own. It also would have meant that some of Lucent's institutional investors that aren't permitted to own stocks of foreign companies would have to divest their holdings, putting further pressure on the combined company's share price.
Other pundits quoted unnamed company officials as saying the deal ran into problems because Lucent wanted equal representation and control in the combined entity that would be about 58 percent owned by Alcatel. Other concerns were possible antitrust problems and French control of Lucent's prized Bell Labs research unit.
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