Jones Lang LaSalle


LUCENT HEADS TO PARIS

Marriage with Alcatel will create the world's telecom gear kingpin
Monday, April 03, 2006

BY KEVIN COUGHLINStar-Ledger Staff

For Lucent Technologies and Alcatel, the second time was the charm.

The two telecom gear makers, whose romance fizzled in 2001 due to control issues, yesterday confirmed plans to tie the knot, a trans-Atlantic union that will create the industry's biggest player if U.S. and French government officials give their blessings.

"We know each other well," said Lucent Chief Executive Patricia Russo, who will move to Paris as CEO of the merged company. "We share a common vision of where networks are going and what expertise is needed to get them there."

"Five years ago we went a very long way to get this done," said Alcatel CEO Serge Tchuruk, who becomes nonexecutive chairman. "Not so many companies can offer what Alcatel and Lucent can. ... The picture, I believe, is quite compelling."

A corporate name has yet to be chosen. The combined company will be based in Paris, but will keep its main U.S. office and Lucent's famed Bell Labs in Murray Hill. The combined company will start with 88,000 employees, but plans call for about 8,800 layoffs over two years to help shave $1.7 billion in costs.

Analysts were quick to call it a takeover by the larger Alcatel. They said Lucent was lucky to find a suitor, period. The company has more than $2 billion in net liabilities from its retiree health plan.

"Forget this merger-of-equals stuff. Alcatel is buying Lucent," said telecom expert Steve Levy.
Robert Rosenberg of the Insight Research in Boonton said: "It's clear (Lucent's) stock is beat to hell and these guys can really use a life raft."

"If you can't increase shareholder value through operations, you do a Hail Mary," said Edward Snyder of Charter Equity Research.

Although the board of the combined company will include six members from each side, there will be two independent directors from Europe. The management team also will be skewed toward Alcatel, four members to two, and Alcatel shareholders will own about 60 percent of the combined company.

The two sides said the deal, which they hinted at on March 23, should take six months to a year to complete, including reviews by U.S. and European regulators. Both companies' boards approved the deal.

To allay potential security concerns, the merged company plans to create a U.S. subsidiary to oversee Bell Labs' government contracts. The subsidiary will be managed by three independent U.S. citizens acceptable to Washington.

Lucent and Alcatel have a combined market capitalization of $36 billion and annual revenue of $25 billion, ahead of the Swedish telecom vendor Ericsson's $19.9 billion in revenue.

Dogged by bad decisions, accounting irregularities and a telecom industry slump, Lucent has shed divisions, axed executives and slashed its global work force from more than 157,000 people to 30,200 since 2000. (About 6,400 now work in New Jersey.) Lucent, which was spun off from AT&T in 1996, clawed its way back to profitability in 2003 -- thanks mostly to accounting credits for pension surpluses.

Lucent shareholders, who have seen one of America's most widely held stocks plummet from $84 a share in 1999, will receive just $3.01 per share. That is down 4 cents from Friday's closing. At that price, the value of the deal is about $13.5 billion.

Alcatel also has struggled. Between 2001 and 2003, Lucent and Alcatel racked up combined losses of $43 billion.

Their customer base, meanwhile, is consolidating. SBC bought AT&T, and BellSouth is next. Verizon swallowed MCI. Sprint gobbled up Nextel. Mega-customers can command lower prices for gear. At the same time, hungry Chinese vendors have intensified the competition.

Lucent and Alcatel hope to compete more effectively by joining forces, in the first of many possible mergers by major vendors.

"Our industry is at the beginning of a major transformation," Russo said. "If you look at our global balance, it could not be more perfect."

Lucent looks forward to tapping Alcatel's global markets. Alcatel seeks a greater toehold in North America.

They may need their newfound heft to compete against Cisco Systems. The top maker of Internet network gear is setting its sights on Internet TV, through its acquisition of Scientific Atlanta. Insight Research says the U.S. market for streaming media -- video on-demand via the Internet -- will surge from last year's $958 million to $6 billion in 2011.

Alcatel is a leading supplier of products to enable Internet TV, and to provide phone services via the Internet. As phone companies try to fend off cable competition by bundling voice, wireless, broadband and video services, Alcatel is well-positioned to build the video piece for them, according to Inder Singh of Prudential Equity.

The combined company pledged to make job cuts fairly. But strict French labor policy could result in U.S. workers feeling the pinch, Singh wrote in a report. Alcatel's separate talks to boost its stake in French defense contractor Thales might be meant to prevent future hostile takeovers, Singh added, since the French government would have to approve such mergers.

During the Memorial Day weekend in 2001, Lucent and Alcatel flirted at a chateau outside Paris and nearly cinched a deal. Under different leadership, Lucent balked at taking a subordinate role.

This time, the pre-nuptial agreement packs a punch. It will cost either side $500 million to leave the altar.

The Lucent Retirees Organization, concerned about $34 billion in pension assets for 235,000 retirees and spouses, has urged the government to block the deal if benefits are not guaranteed. The Communications Workers of America, which represents about 3,150 Lucent workers and some retirees, also is watching.

Retirees have been sharply critical of Lucent's executive compensation. A study by Corporate Library cites Lucent among companies with the widest gap between CEO pay and performance: Russo's $17.3 million total compensation during five years compares with a minus-80 percent total shareholder return.

Veterans of Bell Labs -- a U.S. icon that spawned the transistor, lasers and satellite communications -- were left pondering life for the "crown jewel" under a French flag.
"It's a necessary thing," Arno Penzias, who won a Nobel Prize for helping confirm the Big Bang theory of creation, said of the merger.

"Given the change in the way telecom services and equipment is funded and supported, I think it would be appropriate to have some companies merge and adjust to the realities of the market," said Penzias, a former chief scientist for Lucent.

Robert Lucky, former research vice president for Bell Labs, said he worries about the labs' fate, and about how consumers and national security could suffer as telecom consolidations try to re-create the old Bell System monopoly. But Lucky isn't troubled about Lucent getting hitched to a French company.

"I don't think of Alcatel as a French company," Lucky said. "I think of them as an international company. Telecom is an international business, and Alcatel is an international business."
Kevin Coughlin covers technology. He may be reached at kcoughlin@starledger.com or (973) 392-1763. Staff writer Tom Johnson contributed to this report.

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