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French communications-equipment maker Alcatel said on Sunday
it would buy smaller U.S. rival Lucent Technologies Inc. for $13.4
billion to gain market heft and broaden its product mix.
Together, the companies would have total revenue of $25 billion,
roughly matching current industry leader Cisco Systems Inc.
<CSCO.O>. They would also wield greater clout to negotiate prices
with customers and enjoy a broader research and development base.
"Competition is increasing and size and scale really matter," Lucent
<LU.N> Chief Executive Patricia Russo told analysts and reporters
on a conference call, adding that the prospect of joining the
companies' research and development muscle helped to cinch the deal.
Russo, 53, will serve as CEO of the combined Paris-based company,
although she does not speak French.
The transaction, which analysts said could trigger other mergers
throughout the equipment sector, comes five years after Lucent and
Alcatel first discussed a merger. Talks broke down in 2001 after Lucent
balked at the idea of a takeover, rather than a so-called "merger of
equals."
Alcatel <CGEP.PA> <ALA.N> would now own 60 percent of the
combined company, whose name has yet to be determined. It expects the
deal to boost earnings per share in the first year, excluding
restructuring charges.
JOB CUTS
The companies plan to cut about 10 percent of their combined work
force, or about 8,800 jobs. Alcatel Chairman and Chief Executive Serge
Tchuruk would be nonexecutive chairman.
"The question for Alcatel/Lucent is, can they put this company together
without a lot of integration risks?" UBS analyst Nikos Theodosopoulos
said.
With the deal, Lucent would gain a stronger partner after struggling to
cut costs and restructure following the loss of business after the
burst of the Internet bubble, analysts said.
Alcatel, which has expertise in high-speed digital subscriber line
(DSL) technology, would gain Lucent's dominance in wireless technology
and contracts with big carriers such as Verizon Communications
<VZ.N>.
Alcatel also gets Bell Labs, Lucent's historic research arm, which is
responsible for technological inventions ranging from transistors and
lasers to cellular telephone technology, data networking and
communications satellites.
The companies expect the deal to close in six to 12 months, but
analysts said the French and U.S. governments will likely scrutinize
the structure of the transaction to ensure that each firm's sensitive
military contracts are protected.
NATIONAL SECURITY
Lucent said it would create an independent unit that would run some
U.S. government work. The subsidiary would be separately managed by a
board composed of three U.S. citizens "acceptable to the U.S.
government," Russo said.
Analysts said exactly what would go into that subsidiary is likely to
be open for debate, as well as a review by the Committee on Foreign
Investment in the United States (CFIUS), which must clear foreign
acquisitions of U.S. companies.
Lucent's government work includes an advanced communications system for
the Defense Advanced Research Projects Agency, the Pentagon's
technology incubator.
"I don't think there's any rational reason for anyone to oppose this
deal. But rationality and politics are two different things. It doesn't
mean that this deal doesn't become a political football," said Stephen
Kamman, an analyst with CIBC World Markets.
Several recent deals with international companies have raised national
security concerns among U.S. lawmakers. Most recently, state owned Arab
company Dubai Ports World agreed to transfer operation of six U.S. port
terminals to a U.S. entity to defuse a political firestorm.
DISCOUNT PRICE
Under the terms of the deal, Lucent shareholders will receive 0.1952 of
an ADS (American Depositary Share) of Alcatel for every common share of
Lucent that they currently hold.
The deal values Lucent at about $3.01 per share, or slightly below its
closing stock price of $3.05 on the New York Stock Exchange Friday.
Despite that discount, Lucent Chief Financial Officer John Kritzmacher
called the deal "fair and equitable." The price reflects a 6.7 percent
premium over the price of Lucent's stock before news of the merger
talks first emerged 10 days ago.
The price also values Lucent at about 17 times projected earnings,
which is below the industry average of about 22 times.
Analysts said the deal could force rivals to add more sales staff,
revamp their product lines or consider mergers as a way to cut costs.
"I think everybody's thinking about what they want to do when they grow
up," CIBC's Kamman said. "This is going to drive some more
soul-searching."
SATELLITE COMPLICATIONS
The Alcatel-Lucent deal has been partly complicated by Alcatel's desire
to transfer its satellite unit to France's Thales SA <TCFP.PA> in
exchange for a larger stake in Europe's biggest defense electronics
company. The move is aimed placing Alcatel's sensitive civil and
military satellite projects under control of a French entity.
Meanwhile, Franco-German Airbus parent EADS <EAD.PA> has
campaigned to be allowed to contribute its own satellite unit in return
for a Thales stake and shared power with Alcatel.
Thales said its board would meet on April 4 and look at the
"complementary" proposals from both Alcatel and EADS.
Alcatel shares closed down 1.5 percent at 12.77 euros on Friday. Its
ADS closed at $15.40, off 31 cents, or 2 percent.
(Additional reporting by Michele Gershberg and Robert MacMillan in New
York, and Jean-Michel Belot in Paris)
($1=.8254 Euro).
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