Alcatel Shares Fall on Lucent Rumors
Rumors suggesting that French telecommunications equipment giant Alcatel may soon buy troubled U.S. equipment maker Lucent Technologies prompted investors to savage Alcatel’s stock Friday, in a sign that the match is far from ideal, analysts said.
“I don’t think the shareholders would approve the deal. [Alcatel] is still profitable and showing growth,” whereas Lucent is in deep trouble, said David Heger, an analyst with AG Edwards & Sons.
Other analysts questioned the logic of Alcatel reportedly proposing to buy the struggling Lucent for more than $40 billion--a sum greater than its own $37.1-billion market value. Lucent’s market capitalization at the close of trading Friday was $33.8 billion.
The acquisition rumor, first reported by the New York Times on Friday, may have been a trial balloon floated by Alcatel to test market reaction, according to George Hunt, an analyst with Wachovia Securities.
“They got a pretty clear message that the market doesn’t like it,” Hunt said.
Shares in Lucent, the No. 1 U.S. phone equipment maker, rose 14 cents to close at $9.95 in New York Stock Exchange trading Friday. Alcatel’s shares lost $1.89, or nearly 6%, to close at $30.15 in trading Friday, also on the NYSE.
“[Lucent] would bring Alcatel a much better presence in the North American market and fill a couple of holes in its product line, but at great cost,” Hunt said, including overlapping product areas and the prospect of a massive management task to absorb Lucent’s hugely inefficient operations.
The acquisition rumors follow Lucent’s stunning descent in recent months. The company’s stock has lost 85% of its value since hitting a 52-week high of $67.19 in July. But the problems had been mounting for some time. Lucent gradually lost market share to faster-moving companies such as Cisco Systems--leading to the ouster in October of Lucent Chief Executive Rich McGinn. He was replaced by Henry Schacht, Lucent’s chairman from 1995 to 1997.
By December, the company’s stock had fallen to a three-year low after its second profit warning in three months and an announcement that it would shave $1 billion in costs. In January Lucent announced a $1-billion first-quarter operating loss and said that it would take a $1.6-billion charge for restructuring, including cutting 16,000 jobs, or 15% of its work force.
Lucent’s stock fell further on reports it had begun to draw on bank credit lines--suggesting the company may have burned through much of the $3.8 billion in cash it had at year-end.
Bankruptcy rumors began to swirl around Lucent early last month. On April 24 the company reported a staggering $3.7-billion second-quarter loss, but its stock rose as streamlining efforts were seen as finally beginning to slim down a bloated bureaucracy.
Despite Lucent’s daunting financial problems, Alcatel may see several appealing features in Lucent, analysts said. One of these would be Bell Labs. Scientists at Lucent’s venerable research arm have won six Nobel Prizes for inventing the transistor and other fundamental breakthroughs in physics, and Bell Labs holds about 26,000 patents.
Lucent also boasts a large fiber-optic cable operation. Alcatel reportedly has bid $5 billion in cash for the optic cable division, which Lucent has said it might sell to raise badly needed funds. If Alcatel took over Lucent’s optical business, the acquisition would make the French company the world leader in fiber-optic cables, Heger said. Such cables handle much of the world’s long-distance voice and data transmissions.
Alcatel also might covet Lucent’s wireless division.
And Lucent’s long-standing customer relationships in the lucrative U.S. market could aid Alcatel’s expansion efforts here, said Christin Armacost, an analyst with SG Cowen Securities.
If the Alcatel acquisition of Lucent fails to materialize, Lucent will be forced to move ahead with aggressive cost cutting and to speed product development to regain lost customers.
The company also might have to sell other assets to reduce debt and shore up its wireless and optical switch divisions, Hunt said.
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Reuters was used in compiling this report.
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Telecom Trouble
Like most telecom equipment makers, Lucent and Alcatel have seen their shares plummet during the tech downturn, though few have suffered as dramatically as Lucent. The once-soaring manufacturer’s stock has fallen about 85% since July.
Source: Bloomberg News
