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Lucatel: Initial Reactions to the Lucent-Alcatel Merger (LU, ALA)

by: SA Editors March 24, 2006 | about stocks: ALA / LU    
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Lucent Technologies Inc. (NYSE: LU) and Alcatel (NYSE: ALA) are reviving the merger talks that began in 2001. The intended 'merger of equals' will be priced at market, with no premium to the stock price. Lucent's market cap is currently $12.6 billion, and Alcatel's is $22 billion.

Lucent reported a Q1 loss of $278 million due in part to a drop of $21 million from a year earlier. Lucent lowered 2006 guidance, with revenue projected to grow only in low single digits.

Alcatel recently announced its first dividend in four years. Q4 profits grew from $564 million to $655 million on improved sales and operating margins. Annual revenues grew from $14.8 billion in 2004 to $15.9 billion in 2005.

Initial reactions from the market:

Cultural and Logistical Challenges: The WSJ notes that Lucent CEO Pat Russo will likely take over management of the merged company. "Given the cultural and logistical challenges, a merger could prove to be among the more complicated recent couplings in the industry. With protectionist sentiment growing in both the U.S. and Europe, a merger could prove a critical test of cross-border cooperation for the French and U.S. governments."

Om Malik on Benefits of the Merger:

As Bells have consolidated, the Alcatel’s gear is now powering most of the broadband networks, and future triple play projects like Project Light Speed. Lucent, meanwhile has seen its role shrink, but still has managed to hang on to the wireless business from the Bells. The two companies, have a good share of the Bell cap-ex. Together, they have a lot of things going for them. Here is a list of where together they will be #1 in installed base. Such as dying but still money generating Class 4 and Class 5 switches, Frame Relay and ATM (The old Cascade/Ascend and Newbridge) and of course, DSL...

The best thing these two companies could do is buy Juniper and become a serious headache for Cisco, but that’s in the future. But this will not be the first merger. Expect some really radical movements - Cisco and Nortel; Cisco and anyone; Siemens + Ericsson + Juniper … on and on. You know who wins in this - investment banks. Phat Phees Baby! Or as they say on Wall Street, Good Times are back.

Patrick Donegan, Light Reading on implications for wireless: "From a wireless perspective, a combined Lucent and Alcatel would be a clear global number two behind Ericsson. It would be number one in CDMA and be approaching a 10 percent share in GSM, with strong momentum in the key emerging market opportunities. In W-CDMA it would have strong account presence in Cingular Wireless LLC and Orange SA (London/Paris: OGE - message board) as well as good prospects in China, Russia, and India. And it would also have a presence in WiMax."

Jean-Charles Doineau, Ovum (in MarketWatch) on what Lucent offers: From a technology perspective, Alcatel is in a stronger position than Lucent. It is a leader in products such as DSL and WCMDA, which are very much in demand at the moment. Lucent, however, has a strong relationship with the former Bells. To Alcatel, Lucent represents an open door to the big U.S. service providers."

Mark Evans on future consolidation: "The Alcatel-Lucent deal, which has been rumoured before, is the kind of transaction the telecom equipment industy has expecting for the past several years because it is widely believed the market has to consolidate. So far, however, everyone has been afraid to make the big leap. That said, there have a series of joint ventures (Nortel-Huawei, for example) established, which suggests there's a lot of dating happening but everyone is still commitment-phobic and refuses to get married."

Jeffries International analyst's pessimistic view (in MarketWatch): "We believe a merger between Alcatel and Lucent carries the same clunky rationale as when it was first attempted in 2001, industry consolidation at the expense of inevitable disruption. The businesses look more disparate than complementary and limited overlap makes for modest synergies from an Alcatel perspective".

IP Democracy on implications for Siemens: "This news follows a disputed article in LightReading suggesting that Lucent and Nokia, among other players, are bidding to buy top telco tech vendor Siemens Communications Group.

Siemens executives bluntly deny they are preparing to sell out to Lucent, Nokia or anybody else, but do admit they’ve held discussions with a lot of rivals about how to best align forces to deal with the consolidating telco business, discussions they claim every tech vendor is holding. Whatever the case may be, there’s no denying that a round of consolidation is in order for the vendors who supply the shrinking pool of telecom providers."

Stephane MOT on the end of Ma Bell: "This non-event simply epitomizes the end of Ma Bell as we knew her. AT&T, the born again brand, seems to enjoy a new life from Plano, TX... but whatever happened to those prestigious labs ? It's no more about the creativity of human beings, the ability to cope with new environments, to face the future. It's about the swiftness of paper, the ability to purchase evolutivity, to buy a few months."

Related:

  1. More opinion and analysis of Alcatel and its stock
  2. More opinion and analysis of Lucent Technologies and its stock
  3. Full transcript of Lucent's most recent conference call
  4. Full transcript of Alcatel's most recent conference call

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