Alcatel, Lucent Merger to Create Superpower

Alcatel and Lucent Technologies Inc. early last month divulged plans to merge in a deal that will create a company with an aggregate market capitalization of $36 billion, and named Patricia Russo, Lucent’s chairman and CEO, to run the combined company.

If the Alcatel/Lucent deal goes through, Russo will lead a communications powerhouse with revenue of $25 billion and 88,000 employees worldwide that is expected to touch off a series of M&A action by major telecom equipment manufacturing, possibly including Ericsson, Nortel Networks Ltd. and Siemens. How Cisco Systems Inc., which will be eclipsed in size by the new Alcatel/Lucent and which is just starting to digest its Scientific-Atlanta acquisition, will respond also remains to be seen.

Of course, the driving forces behind the Alcatel/Lucent deal are many, but the primary one is sheer size and the economies of scale it will enable. Companies like Alcatel and Lucent expect to feel a tighter squeeze by their key customers like AT&T Inc. (the combination of SBC Communications Inc. and AT&T Corp., and if all goes as planned, BellSouth Corp.) and Verizon Communications Inc. (which recently enveloped MCI), which have led the charge to grow larger through acquisition. At the same time, vendors are feeling pricing pressure from low-cost Asian competitors.

Alcatel and Lucent expect to achieve annual pre-tax cost synergies of about $1.7 billion within three years, a substantial majority of which is expected to be achieved in the first two years. The synergies will come from consolidating support functions, optimizing the supply chain and procurement structure, leveraging R&D and services across a larger base, and reducing the combined worldwide workforce by approximately 10 percent.

Under the terms of the agreement, Lucent shareowners will receive 0.1952 of an ADS (American Depositary Share) representing ordinary shares of Alcatel (as the combined company) for every common share of Lucent that they currently hold. Upon completion of the merger, Alcatel shareholders will own approximately 60 percent of the combined company and Lucent shareholders will own approximately 40 percent of the combined company. The board of directors of the combined company will be composed of 14 members and will have equal representation from each company, including Serge Tchuruk, chairman and CEO of Alcatel, and Russo, five of Alcatel’s current directors and five of Lucent’s current directors. The board also will include two new independent European directors to be mutually agreed upon.