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Alcatel Completes Purchase of Lucent

Posted on: Thursday, 30 November 2006, 15:00 CST

By LAURENCE FROST

PARIS - France's Alcatel SA completed its $11.6 billion acquisition of Lucent Technologies Inc. Thursday, creating a new global telecom-equipment maker that can cash in on fast-growing "triple-play" services offering phone, TV and Internet on a single wire.

The companies announced completion of the deal in a statement issued after the first meeting of their new combined board in Paris. Paris-based Alcatel all-stock acquisition of its former U.S. rival was approved Sept. 7 by shareholders both sides of the Atlantic.

The new company will begin operating as Alcatel-Lucent on Friday, the statement said, when its shares will also begin trading on Euronext Paris and the New York Stock Exchange.

"This combination represents a strategic fit of vision, geography, solutions and people," said Lucent Chief Executive Patricia Russo, formally appointed Alcatel-Lucent CEO during the same board meeting. Outgoing Alcatel boss Serge Tchuruk also stays on as non-executive chairman.

With combined sales of $25 billion in 2005, excluding businesses sold off, Alcatel-Lucent overtakes LM Ericsson AB's $21.6 billion in revenue to control about 18 percent of the fiercely competitive market for telecom gear. The partners have promised $1.8 billion in annual pretax savings within three years - half of which will be made by cutting about 9,000 jobs, or 10 percent, of the combined work force.

"Management seems extremely confident in its ability to achieve" the savings, said Odon de Laporte, an analyst with Paris brokerage CA Cheuvreux, which has improved its assessment of the all-stock deal in the eight months since it was announced.

Laporte expects Lucent's pension fund, previously a worry for some Alcatel shareholders, to balance its books by the end of the year, after a $2.4 billion deficit at the close of 2005. "We're rather reassured," he said.

Although the tie-up was billed as a "merger of equals," former Alcatel shareholders control about 60 percent of the combined company. The new 14-member board comprises six directors from each side and two independent European directors - named Thursday as Jean-Cyril Spinetta, chairman and CEO of Air France-KLM, and businesswoman Sylvia Jay, who already holds directorships with Compagnie de Saint-Gobain, the French construction materials maker, and cosmetics maker L'Oreal's British arm.

Analysts say the Alcatel-Lucent product line is well suited to triple-play networks combining Internet, phone and TV, as well as services that blend fixed-line and mobile phone offerings - another growth area. Orange, France Telecom SA's Internet and mobile arm, plans to roll out Alcatel-Lucent hardware next year allowing customers to use their cell phones at fixed-line prices when at home, following similar launches by other European telecom operators including BT Group PLC.

Alcatel has invested heavily in advanced fixed-line networks, analyst Eric Carballeda of Paris brokerage Aurel Leven said, and Lucent has developed switches that allow mobile phone users to move seamlessly between a cellular network and a wireless Internet connection in mid-call.

The technological fit between Alcatel and Lucent "will maximize their prospects of winning big contracts in fixed-mobile convergence," said Carballeda.

Building on earlier consolidation in the sector, the combination will also help telecom equipment makers resist growing pressure on prices after a wave of mergers and acquisitions among their customers, the phone operators. Alcatel agreed to buy Nortel Networks Corp.'s third-generation UMTS mobile networks earlier this year. Nokia Corp. and Siemens AG also announced a telecom equipment joint venture in June, eight months after Ericsson bought Marconi.

Consolidation is "very important for the equipment makers, as they were losing pricing power very quickly," Carballeda said.

Unlike either Alcatel or Lucent alone, the combined company will have a strong, evenly distributed presence around the globe. Europe, North America and Asia each supply close to one-third of revenue, spreading the risk posed by localized economic shocks. Last year, North America accounted for 14 percent of Alcatel's sales - the smallest share by region - while Europe generated 13 percent of Lucent's.

Alcatel-Lucent may look strong on paper, but Russo will have to work hard to integrate New Jersey-based Lucent with its French rival and realize the benefits. The task could throw up as many cultural challenges as business problems, as other recent trans-Atlantic mergers suggest. Cultural sensitivities were blamed for difficulties at DaimlerChrysler AG, which took several years to get the 1998 acquisition of Chrysler by Germany's Daimler-Benz to work.

On the positive side, analysts say there are clearer benefits up for grabs - and more incentives to cooperate - in telecom equipment mergers than in cars.

While automakers are obliged to maintain separate product lines to suit local consumer preferences and needs, Cheuvreux's Laporte said, telecom gear is "much more globalized than auto markets, so there's a bigger advantage in being a global player."

Source: Associated Press/AP Online

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