France's Alcatel to buy Lucent for $13.4 bn

By Sudip Kar-Gupta and Jessica Hall

PARIS/PHILADELPHIA - French communications-equipment maker Alcatel said 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 (21 billion euros), roughly matching current industry leader Cisco Systems Inc. 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 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 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.

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 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 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 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)