Ben Klayman
CHICAGO: The Murray Hill, N.J.-based company Lucent broke off merger talks
with French telecom equipment maker Alcatel because the two disagreed on a
valuation of the company and Lucent was apprehensive about getting approval in
Washington for the deal, industry sources told Reuters.
While the sources said Alcatel is proceeding with a $5 billion bid for
Lucent's fiber-optic cable unit, the merger talks raised the question whether
Lucent, which just reported a $3.7 billion second-quarter loss, is in play and
which companies might be suitors.
A Lucent spokesman said the company doesn't discuss rumors and speculation.
The company's stock closed Friday up 29 cents, or 2.75 per cent, at $10.83 in
New York Stock Exchange trading. Over the past year, the shares have
underperformed the Standard & Poor's 500 Index by about 80 percent.
Wall Street is skeptical a merger or sale can occur given a stock market that
has been pummeled and a drastic slowdown in sales for many companies that makes
forecasting even six months ahead difficult. "Every company you look at as
a potential candidate, it just doesn't work," Dresdner Kleinwort
Wasserstein analyst Ariane Mahler said. "Lucent is either too big or
there's significant overlap."
Other potential candidates include Italy's Pirelli SpA , cell-phone giant
Nokia of Finland, Swedish telecom equipment maker Ericsson , Germany's Siemens
AG and networking giant Cisco Systems Inc. , analysts and portfolio managers
said.
Nokia, Ericsson, Siemens and Cisco officials declined to comment, while
Pirelli couldn't be reached. Nortel Networks Corp. , the world's largest telecom
equipment maker, was dismissed as a candidate because of antitrust concerns,
while Japan's NEC Corp. and Fujitsu Ltd. were discounted because most felt they
wouldn't want to tackle the cultural clashes.
Cisco would make sense but isn't likely because it considers Lucent an
"old elephant," while Ericsson is dealing with its own restructuring,
analysts said. Nokia has been floated as a bidder that would keep Lucent's
wireless infrastructure business and sell the other units, analysts said. A
Lucent deal would allow Siemens or Pirelli to boost their North American
presence.
"If you are a big European (manufacturer) and you want exposure here,
what a great way to do it. It's instant footprint," said one analyst, who
asked not to be identified. In the past couple of months Lucent has been
shedding itself, carrying out high profile initial public offerings of some
units. Last October the company spun off Avaya Inc. , which serves large
corporate customers, and more recently, Agere Systems Inc. , its optical
components unit in an IPO that raised $3.6 billion.
After the fiber-optic cable unit is sold, Lucent will have its wireless, data
and optical networking, circuit switching and professional services unit.
However, that product line doesn't excite some analysts and investors.
For that reason, Lucent probably raised the merger idea with others, said
Stephen Gauthier, portfolio manager with Pictet & Cie in Montreal.
"I think in the end, what they would like to do is merge with someone
else because without the optical division there's nothing much exciting in the
story anymore," he said. But some investors don't want to see Lucent,
rumored for months to be a takeover target, to sell out now because its massive
restructuring has only just begun.
The company launched a 7-point restructuring program in January and said
earlier this week the plan and other charges would total $2.7 billion.
"I would rather see them spending days in negotiations getting rid of
the optical division and focusing on how they're going to fix their problems
than worrying or not whether they're going to take a low-ball bid for the
company," said Richard Steinberg, president of Florida investment adviser
Steinberg Global Asset Management.
Even a moderate turnaround could push the stock to $19 a share, said
Steinberg, whose firm owns 128,000 Lucent shares. Dresdner's Mahler said while a
merger with or acquisition of Lucent is unlikely, the company is undervalued.
"They have extremely valuable patents in just about everything and
anything," she said. "They could be of interest to a lot of people for
pieces that they have." However, Tim Ghriskey, senior portfolio manager
with mutual fund company Dreyfus Corp., feels Lucent isn't worth much more than
its current stock price.
"We'd be very surprised if there was anyone that would step up and buy
the whole thing," he said. "Everyone believes they can build it better
than buying it."
(C) Reuters Limited 2001.