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Investors don't buy Lucent acquisition rumor

Wall Street loves a good rumor, especially one as tantalizing as France's Alcatel buying Lucent Technologies for $40 billion. But most people aren't buying it.

    Wall Street loves a good rumor, especially one as tantalizing as Friday's scuttlebutt marrying telecom giants Lucent Technologies and France's Alcatel in a stock deal worth as much as $40 billion. But most analysts and shareholders aren't buying it.

    Lucent shares inched up only 12 cents to $9.93 Friday even though various reports said Alcatel would pay a 20 percent premium for a company that lost $3.7 billion in its latest quarter, is in the midst of a massive restructuring program, and isn't expected to turn a profit until the fourth quarter of fiscal 2002 at the earliest.

    Alcatel shares lost $1.89, or 6 percent, to $30.15, a clear indication that its shareholders aren't thrilled about the possibility of acquiring Lucent even at its relatively inexpensive price.

    "I don't think it will happen," said George Hunt, an analyst at Wachovia Securities, "mainly because Lucent believes it can turn things around on its own. There's too much product overlap between the two companies, and while it would certainly give Alcatel a strong presence in North America, it would come at a very high price."

    Hunt added that Lucent shares surely would have moved higher--and Alcatel shares would have tumbled further--if shareholders were convinced the rumor had any merit.

    Alcatel's rumored interest in Lucent's fiber-optics business, reportedly on the block for around $5 billion, has, according to sources, evolved into full-blown merger discussions.

    If the deal came to fruition, it would instantly become the world's largest provider of telecommunications equipment, knocking Nortel Networks back to a distant second.

    By combining Lucent's strong customer base in North America with Alcatel's commanding presence in Europe, Asia and Latin America, analysts said the deal would expand market opportunities for both companies' products and save between $1.5 billion and $2 billion a year in manufacturing and marketing expenses.

    However, the two companies have more than $11 billion in outstanding short- and long-term debt and the deal would likely dilute Alcatel's earnings per share by about 75 percent in fiscal 2002, according to ABN AMRO analyst Kenneth Leon.

    Along with a foothold in North America and a promising fiber-optic unit, Alcatel also would get its hands on Lucent's renowned Bell Labs research and development group as well as its switching, transmission and core network products.

    Lucent would get some much-needed cash, distribution channels throughout the world and an immediate solution to its unsettled management team.

    Other analysts said the timing of such an enormous merger makes little sense.

    "If this were to occur, we would view this as negative for Alcatel as the costs far outweigh the benefits in our opinion," Michael Ching, an analyst at Merrill Lynch, wrote in a research note. "The communications equipment market, and especially in the wireline segment, is going through a transition period of slower growth and such a deal would put more weight on management time with regard to integration issues and new potential business plan developments."

    Lucent has already cut 10,000 employees as part of its effort to return to profitability and figures to reduce its size even more as interim Chief Executive Henry Schacht continues the company's massive overhaul. Some analysts believe it could cut as many as 20,000 more jobs, or 22 percent of the work force remaining after the completion of the 15 percent reduction announced in January.

    Analysts said Lucent's strong-willed management team may be looking for a quick fix rather than enduring a lengthy restructuring plan that may or may not return significant shareholder value in the foreseeable future.

    "The fact that this story is out there and it appears that Lucent is at least in the early stages of discussing a merger tells me the company has given up hope of getting back to profitability any time soon," said an analyst who declined to be named. "It's a hard pill for them to swallow, but it might be the only sensible choice at this time."

    Alcatel's recent history suggests it's not afraid to acquire struggling companies to bolster its product lines, most notably its $7.1 billion acquisition of Newbridge Networks in February 2000.

    "I don't think Lucent's ready to give up," Hunt said. "But there's a possibility that Alcatel might pursue a hostile takeover at some point."

    If Friday's trading is any indication, Alcatel shareholders would prefer the company sort out its own problems, including this week's announcement that 360networks will postpone construction of its pan-Pacific fiber-optic network, before taking on Lucent's problems.

    "We question whether Alcatel shareholders will want the company to accept the challenge of trying to fix a beleaguered Lucent when the entire telecom equipment industry is in a slump," David Heger, an analyst at A.G. Edwards, wrote in a research note. "Alcatel has its own share of uncertainty in this difficult industry environment and may be viewed as trying to bite off more than it can chew acquiring Lucent at this time."

    Earlier this week, Moody's Investors Service, the debt-rating agency, gave Alcatel a negative "outlook" based primarily on the possibility of a potential tie-up with Lucent.

    Other analysts said competitors would welcome the integration issues associated with a merger of this size.

    "If I'm Nortel, I'm rubbing my hands together," one analyst said. "These are two companies that have enormous egos, based on two different continents with vastly different cultures. A merger like this could easily distract both companies and open the door for competitors to sneak in while they're working out all the kinks."

    Nortel shares closed up 39 cents to $14.45 Friday.

    Merrill Lynch's Ching added that "the integration issues arising from such a deal would potentially provide a window of opportunity for other wireline companies to benefit from, such as Nortel and even Marconi."

    In the end, the pride and patriotism could be the biggest obstacle standing in the way of a Lucent-Alcatel merger.

    "Lucent is determined to be the world's largest telecom company," one analyst said. "There's no way they're going to do that by selling out to another company, especially a French company. It's a matter of considerable pride to their management team."