Alcatel Talks With Lucent Fall Apart

By ELIZABETH DOUGLASS

May 30, 2001 12 AM PT

TIMES STAFF WRITER

Lengthy merger talks between struggling Lucent Technologies Inc. and Paris-based Alcatel collapsed Tuesday after the two communications equipment makers couldn’t agree on crucial matters such as who would control the combined firm.

The abrupt end to the potential $22-billion to $25-billion deal came at the conclusion of intense negotiations in Paris that lasted through the long weekend. At the moment when many expected the talks to culminate in a merger announcement, the two companies parted ways instead.

Alcatel and Lucent issued a joint statement late Tuesday that for the first time publicly acknowledged their merger talks but also declared that they “have not resulted in any agreements and have been terminated.” No reason was given for the failed negotiations.

The merger between Lucent, the largest U.S. telecommunications equipment maker, and Alcatel, the second-largest vendor in Europe, would have created a world-dominating powerhouse with more than $50 billion in combined annual revenue.

People close to the companies said Lucent, based in Murray Hill, N.J., wanted a merger of equals whereas Alcatel viewed the deal as an acquisition--a fundamental disconnect that prevented the two parties from agreeing on the makeup of the resulting management team and board of directors, among other things.

In addition, analysts said the deal faced substantial hurdles, including regulatory concerns, cultural differences, overlapping operations and a growing uneasiness among Lucent and Alcatel shareholders.

The deal would have been particularly difficult for Lucent shareholders to swallow, since the reported price tag did not include a premium over the company’s publicly traded stock. That meant shareholders faced the prospect of getting well under $8 per share for a company that was once valued at nearly $300 billion and traded for a respectable $63.50 last June.

Under the reported outlines of the Lucent-Alcatel deal, Alcatel would pay an estimated $22 billion to $25 billion in stock for Lucent, an amount roughly equal to Lucent’s $32-billion market value, minus the value of Lucent’s 58% stake in its newly public spinoff, Agere Systems Inc.

Investors were unenthusiastic about the potential deal, which had been rumored on and off for more than a month. Lucent shares fell $1.08 to $8.32 in regular New York Stock Exchange trading, then rose to $8.59 in after-hours trading once the talks were declared dead. Alcatel dropped 70 cents to $27.41 in regular NYSE trading, then rose to $29.05 after hours.

But Lucent stock’s uptick may soon wear off as the company and its shareholders face up to a daunting question: Now what?

Lucent, which was created in 1996 out of the communications equipment and research divisions of AT&T; Corp., remains financially unstable, so much so that rumors swirled in April that the company would file for bankruptcy.

The company has a heavy debt load from a string of acquisitions and recently announced a nearly $400-million first-quarter loss as customers postponed equipment purchases and the outlook dimmed industrywide. The company reported $33.8 billion in revenue last year.

Late last year, Lucent dismissed its chief executive, Richard McGinn, who had earned widespread praise a year earlier for building the AT&T; spinoff into a giant in its own right.

Now, however, things have changed. Lucent and its industry brethren have lost billions in market value and face dreary days ahead, as phone companies fail or scale back equipment purchases, triggering sharply lower revenue.

Analysts were never convinced that an Alcatel deal would produce a quick fix for Lucent. But many believe that the merger would have helped.

“As hard as it was to try to bring these two parties together, it’s going to be a lot harder for Lucent to find a solution to increasing shareholder value now,” said Ken McGee, an analyst at the Gartner Group. “I think they have to keep divesting inessential or nonstrategic units and get an awful lot leaner . . . and they have to realize that bigger does not mean better.”

Lisa Pierce, a telecommunications analyst at Giga Information Group, said Lucent might now feel pressure to consider other acquisition overtures or to spin off still more of the company’s businesses--a route it has already taken twice, spinning off Agere and Avaya Inc.

“Now, other companies who might have been considering buying one or more parts of Lucent now understand that Lucent is serious about considering those kinds of options,” she said. “But so much has been siphoned off already that they run a risk if they do any more, Lucent won’t be worth much at all.”

Alcatel, on the other hand, is in far better financial condition than Lucent, and thus does not feel the same push to act. Still, analysts believe the scotched deal forces Alcatel to reassess ways to gain a stronger position in the United States telecommunications market.

Through a string of acquisitions, the French company has won solid market positions in equipment for digital subscriber line services, but it lacks standing in key businesses, such as optical networking. For Alcatel, Lucent would have provided the strong U.S. customer base it badly needs.

“It’s clear that Alcatel wants into the North American market, and if they’re serious about that, you either buy Lucent or Nortel,” Pierce said. “Who knows? Maybe talks will go back on [between Lucent and Alcatel] some other time.”

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Now What?

Lucent Technologies’ battered shares slumped 11.5% on Tuesday before the company announced that its merger talks with Alcatel had ended.

Lucent shares, weekly closes and latest on the New York Stock Exchange

Tuesday: $8.32, down $1.08

Source: Bloomberg News

Scraping Along

Shares of Alcatel didn’t get the bounce many other tech issues enjoyed in April, and Tuesday were just above their 52-week low before the company called off merger talks with Lucent.

Alcatel shares, weekly closes and latest on the New York Stock Exchange

Tuesday: $27.41, down $0.70

Source: Bloomberg News

The Companies at a Glance

Lucent Technologies

Business: Telecommunications equipment

Chairman and chief executive: Henry B. Schacht

Headquarters: Murray Hill, N.J.

Market capitalization: $28.3 billion

Number of employees: More than 100,000 worldwide

2000 revenue: $33.8 billion

2000 profit: $1.2 billion