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Alcatel Discussing a Takeover of Lucent Deal Could Bring Shakeout of Phone Equipment Makers

Posted on: Sunday, 26 March 2006, 06:00 CST

By Andrew Ross Sorkin and Ken Belson

Lucent Technologies, the phone equipment maker that became a symbol of the 1990s boom and bust in telecommunications, confirmed Friday that it was in takeover talks with Alcatel of France in a deal that people close to the discussions said would be worth about $12.6 billion.

While both companies spoke of a "potential merger of equals," the people close to the talks said Alcatel would be acquiring Lucent.

After several years of mergers on a huge scale among telephone companies local, long-distance and wireless a deal for Lucent would be the first big step toward a shakeout among the companies that make the equipment for the phone service providers.

The prospect of a big trans-Atlantic deal comes at a time when foreign takeovers have been political flash points in both Washington and Paris. A Dubai company's acquisition of some American port terminals sparked an uproar in the U.S. Congress that led to major changes in the deal, and the French government has sought to thwart cross-border takeovers in energy and pharmaceuticals.

The companies acknowledged in a statement that the talks could fail and said they would not comment further until an agreement was reached or the effort was abandoned. The talks come nearly five years after the two companies called off what would then have been a $22.8 billion merger. That aborted deal had been constructed as a merger of equals but fell apart after the companies could not agree on how much control Alcatel could have.

For Lucent, based in Murray Hill, New Jersey, a sale would be the last chapter in an extraordinary story of boom, bust and struggle. In 2002, the company was on the brink of collapse. It survived by slashing thousands of jobs and billions of dollars of debt.

Yet as Lucent has returned to profitability, the telecommunications landscape in the United States has radically changed. Lucent has lost many of its largest customers as the Bell phone companies have gobbled up rivals, slashed investment in their older copper-line networks and spent more on fiber optic equipment that has fallen in price.

Consolidation among the phone companies the $67 billion AT&T- BellSouth deal this month being the most recent has raised expectations that the equipment makers that serve them will also merge. Lucent and, to a lesser degree, Nortel in Canada have been considered the most likely takeover targets because of their depressed stock prices and lukewarm business prospects.

The outlook was more dire in 2001, when Alcatel and Lucent discussed a merger. At that time, the two companies were roughly equal in size but were struggling as the collapse in spending on telecommunications equipment dragged down their earnings and stock prices. But Alcatel has emerged as the much stronger company, with a market value of nearly $20 billion

To Alcatel, Lucent's most valuable asset would be its CDMA wireless technology used by Verizon Wireless and Sprint Nextel, the second- and third-largest cellphone companies in the United States. The largest U.S. cellphone company is Cingular Wireless. Though only about a third of mobile phone subscribers worldwide rely on this technology, Verizon and Sprint have spent heavily to upgrade their networks to provide more next-generation data services.

Lucent's wireless business would complement Alcatel's leadership in broadband equipment, fiber optic networks and Internet television, all of which are growing quickly. Lucent's leading position in the American market would also dovetail with Alcatel's strength in Europe.

Though Alcatel would be eager to obtain Lucent's clients and leading position in the CDMA market, it may also inherit some of the company's problems. Growth overseas has been uneven; the company's sales in the last three months of 2005 fell more than 15 percent in part because of weak demand in China.

Lucent's roots go back to the age of the telegraph. It was the equipment-making arm of American Telephone & Telegraph and included the research and development unit Bell Laboratories. AT&T spun off Lucent in a $3 billion initial public offering in 1996. The stock quickly became a Wall Street favorite, rising to more than $63 a share and surpassing AT&T in market value by 1998.

But in 2000, demand for communications equipment suddenly slowed, and the company reported a series of disappointing quarterly results. Its chairman and chief executive was ousted, and the U.S. Securities and Exchange Commission began investigating its accounting practices. Its stock price which made up the nest eggs of thousands of Lucent employees slid to a low of 58 cents in 2002.

Patricia Russo was named chief executive that year and pulled the company back from the brink of collapse. In 2004, the company settled the SEC investigation, agreeing to pay $25 million. But the recovery has been anything but robust, and Lucent's shares closed Thursday at $2.82

Alcatel, based in Paris, makes half its sales in Europe but has been making a big push in Asia and North America. Its chief operating officer and president, Mike Quigley, is an Australian born in England. He is expected to succeed Serge Tchuruk as chief executive when Tchuruk steps down in May.

Source: International Herald Tribune

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