Alcatel, Lucent Acknowledge Discussing Merger
Paris-based Alcatel and Lucent confirmed they're in formal merger talks to create the world’s largest telecom equipment company, with combined sales of $25.33 billion. Alcatel is a dominant equipment supplier to carriers in Europe and Asia, and a merger could give Alcatel a stronger position in the U.S. Lucent, an AT&T spinoff that includes Bell Labs, has been a dominant supplier to carriers in the U.S., but has lost market share to competitors led by Nortel. The firms said there’s no assurance a deal will get done, and they won’t comment further until talks end.
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The 2 had earlier discussed a merger, but those talks fell apart in 2001 because of Lucent concerns Alcatel would come out on top. The latest talks are aimed at creating a “merger of equals,” which means in part neither company would receive a premium over its current share price. But Alcatel is the much larger company, with a market cap of $22 billion -- double Lucent’s. “Looking at the relative market capitalizations, Alcatel would most likely end up in the driving seat,” predicted Nomura analyst Richard Windsor in a research note.
The telecom equipment sector has long been expected to see further consolidation similar to the recent spate of carrier mergers. Last year, Ericsson acquired U.K.-based Marconi for Pounds 1.2 billion and Cisco agreed to buy its rival Scientific-Atlanta for $6.9 billion. Last week, Lucent beat out Ericsson to buy Riverstone Networks -- a bankrupt manufacturer of network routers, for $207 million.
“I thought this segment of the industry would have started merging years ago,” said analyst Jeff Kagan. “Timing is right for mergers in the equipment side of telecom for quite a few reasons. The wireless and wireline phone companies that are the customers of these equipment makers have been merging for years, creating a more difficult environment to compete in.” He also cited “problems created several years ago when the industry hit a brick wall and customers stopped spending at the same levels, and when the equipment makers themselves started getting smaller and dealt with a variety of issues including new management and financial issues.”
Debt analyst Sean Egan said the combination with Alcatel would be positive for Lucent’s credit quality, particularly if shares are used for funding. The merger is a natural consolidation, he said: “Suppliers need to keep a large customer base to maintain their bargaining power.” After the talks were confirmed Fri., shares of Lucent went up 10%, Egan added: “People are voting with their feet and boosting Lucent’s share prices.”
Telecom lawyer Ross Buntrock said DoJ would be hard- pressed to oppose the merger. “I don’t see any real antitrust implications given the respect for and the reasons for the deal,” Buntrock said: “I see no sort of stumbling block. It is just part of the continuing saga toward consolidation.”