Analysts: Lucent-Alcatel merger unlikely

As Lucent Technologies Inc. directors reportedly meet this week to discuss a merger with Alcatel SA, analysts say it’s unlikely the two will come together.

Rumors surfaced again last week that Alcatel is looking to acquire Lucent, but this time the rumor had a price attached: US$40 billion. The Financial Times reported that the Lucent board will convene this week to discuss a possible merger.

Forty billion dollars is a lot to pay for a company that is in the midst of a difficult restructuring, has considerable product overlap with the acquirer’s portfolio, and will essentially only buy Alcatel an increased presence in the U.S., some wireless and optical leverage, and a bunch of cultural and integration headaches.

“I think in general the deal is unlikely to happen,” says Nikos Theodosopoulos of UBS Warburg. “The integration challenge and the potential delays due to regulatory review would just make this an administrative and logistical nightmare.”

With other deals, “you say ‘This is a merger made in heaven’; this is a merger made in hell,” says Frank Dzubeck, president of consultancy Communications Network Architects. “There’s so much overlap, either one has to go. It is a gamble on Alcatel’s part, but it is one of the worst financial messes they’ll get into. They might not even survive it themselves.”

Some analysts believe the Alcatel-buying-Lucent rumor grew uncontrollably from reports that Alcatel was looking to buy Lucent’s fiber-optic cable business. Lucent is shopping around its fiber-optics business in an effort to raise cash, and Alcatel emerged as a bidder for the unit.

“I think what’s probably happened… (is this) somehow mushroomed into Alcatel buying the whole company,” says George Hunt, senior vice-president at Wachovia Securities. Hunt believes it’s unlikely Alcatel will acquire Lucent.

“(Forty billion dollars is) a tremendous price to pay just to get bigger presence in North American market,” he says. “Except for some product holes to fill at the high end of optical switching and wireless equipment, I don’t think the merger would bring that much to Alcatel. There’s pretty significant cultural, company and nationality issues, there will be a lot of product overlap and tremendous integration issues. I think it’s unlikely that this thing goes through.”

In high-end optical, Lucent last week sold millions of dollars worth of its WaveStar Lambda Routers to Global Crossing. In wireless, Lucent last week won a big deal-worth hundreds of millions of dollars to Lucent-with China Unicom to supply 4 million lines of CDMA equipment.

And Lucent recently won a $5.7 billion contract to outfit Verizon with wireless infrastructure.

Beyond optical and wireless, the product overlap between Alcatel and Lucent is considerable. Alcatel is a leader in DSL, so Lucent’s DSL portfolio would likely be vanquished in a merger. Both companies acquired Layer 3 switching start-ups a few years ago – Lucent acquired Prominet, Alcatel bought Xylan and Packet Engines – so that array would have to be consolidated.

Then there’s the legacy voice circuit-switching gear that is the foundation of both companies. Granted, there’s the international delineation: Alcatel is huge in Europe, Lucent in North America. But still, there would be considerable product integration and consolidation issues, especially as carriers look to gradually migrate to packet telephony infrastructures.

“You’re merging two entities, but you’d have to wipe out one,” Dzubeck says.

Both companies have products to address voice over IP, IP services, content networking, VPNs, softswitches and gateways, and multiservice switching. Lucent is a leader in ATM multiservice switching, by rote of its acquisition of Cascade, so that may be spared. Lucent may also have an advantage in remote-access offerings through its acquisition of Ascend.

But the potential or perceived benefits of acquiring Lucent would still not be worth the cost and discomfort, UBS Warburg’s Theodosopoulos says. “While clearly it’s possible – Alcatel would get a bigger presence in the United States and take out one of their competitors – the issues of integration and length of the pending merger and product overlap make me feel it’s less likely.”