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Lucent, Alcatel end merger talks

The companies' executives call off a potential merger of the telecommunications equipment giants, raising new questions about the future of one of America's premier research labs.

Lucent Technologies and Alcatel executives called off a potential merger of the two telecommunications equipment giants Tuesday, raising new questions about the future of one of America's premier research labs.

French telecommunications equipment maker Alcatel Lucent related story and Lucent confirmed Tuesday that they have been negotiating a merger that would have been valued around $32 billion. The discussions, however, "have not resulted in any agreements and have been terminated," according to a statement released by Lucent. The companies declined further comment.

A source close to Lucent said the deal, which was in the works for the last few months, fell through because Lucent wanted a merger of equals, while Alcatel wanted the deal constructed as an acquisition of Lucent.

"We were looking at the value of getting both companies together to accelerate our turnaround plan," the source said. "But in the last few days, it became clear this was not going to be a merger of equals. It was in the best interest of our shareholders, our customers and employees to pursue our own path."

Another issue, the source said, was that Alcatel offered to buy Lucent with an at-market deal, meaning they wouldn't offer Lucent shareholders anything beyond the company's current stock price.

"We walked away from an at-market deal. There was no premium" for investors, the source said. "If you're talking about a no-premium deal, you want to see a merger of equals."

Lucent will continue to run as a standalone company, although merger talks with Alcatel and other companies could resurface in the future.

"The talks are now terminated, but who knows what could happen? This doesn't shut the door," the source said.

Dataquest analyst Tim Smith believes Lucent might be able to survive as a standalone company, but the question is whether it has the executives and finances to turn the company around. "They have good technology and products and a good installed customer base," Smith said. "But it's the management and finances that's tricky. Do they have the financial wherewithall to pull it off? They could benefit from some good, enlightened management to pull them through."

Wall Street analysts had mixed views on the proposed deal. For Lucent, a merger would have solved its financial woes. For Alcatel, buying Lucent would have increased its presence in North America. Alcatel in recent years has bought a handful of companies, including Canadian network equipment maker Newbridge Networks, to pump up its North American sales.

Some analysts felt the deal made sense.


Gartner analysts Tim Smith and Lawrence Orans say that although a merger between Alcatel and Lucent would have offered some benefit, it would likely not have solved the difficulties that led the companies to contemplate a deal in the first place.

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"Lucent is the biggest suppliers to the Bells, but doesn't have a very noticeable presence in the European telecom operators," said Lehman Brothers analyst Steven Levy. "Alcatel is exceptionally strong with European carriers, and has some presence in the Bells, but for the most part, their presence with large U.S. carriers is limited."

Some analysts believed Lucent's family of optical networking products meshed well with Alcatel's. But other analysts felt there would have been too much overlap in other product areas, and the combination of the two companies would have been a logistics nightmare.

Reports of the possible union with Alcatel raised questions about Lucent's technology being acquired by a foreign company. In the wake of the collapsed talks there are just as many questions about the fate of Lucent, whose technology innovations date back to 1885.

Lucent's recent woes, which left it ripe for the picking by Alcatel, have been surprisingly steep and painful.

"They had investor confidence, a high market capitalization, and Cisco and Nortel on the run. They were acquiring top companies and seemed unstoppable," said analyst Jeremy Duke, of market research firm Synergy Research Group.

Lucent traces its roots to 1885, when New York-based American Telephone & Telegraph Co. became a wholly owned subsidiary of the American Bell Telephone Company. AT&T operated for much of the 20th century as a legally sanctioned and regulated monopoly with a stranglehold on almost all communications research, development and engineering.

In 1984, AT&T was shattered into a new company and seven independent regional telephone companies, or "Baby Bells." A decade later, AT&T CEO Robert Allen decided to chop up the company even more, setting in play the eventual spinoff of Lucent Technologies, the owner of Bell Labs, and computer manufacturer NCR.

After being cut adrift in 1996, Lucent hummed along nicely, beating Wall Street earnings estimates for 15 straight quarters and competing well against giants Cisco Systems and Nortel Networks in the telecommunications equipment market.

But in the past 18 months, the company has been victimized by a series of financial and technology gaffes and its inability to cohesively meld its many acquisitions, including its $20 billion merger with data equipment maker Ascend Communications, analysts say.

see story: Lucent's loans gone bad Sources say Lucent's bureaucratic "consensus" culture--stemming from the old AT&T days--hampered the company when quick action by former CEO Rich McGinn was needed. McGinn, who was at the helm for four years, was ousted last October.

"They had a voice, wireless and data strategy, but nothing seemed to come together," Duke said. "They had a hard time retaining the people they acquired. It was a bad mix of cultures. Here you had this bureaucratic and large entity trying to integrate with entrepreneurs that were less than 10 years old. They never got that nimbleness that Cisco had."

Lucent's acting chief executive, Henry Schacht, has spent the last eight months reorganizing the company, which has included several executive shuffles and the layoff of 10,000 employees.

From an investor perspective, Lucent's tailspin started in January 2000 when the company missed earnings by 18 cents per share and reported a $1 billion decline in sales. The company blamed its problems on being too slow to respond to the need for higher-speed optical equipment, allowing Nortel to take an early lead in the exploding market. Optical equipment allows service providers to send larger amounts of traffic across their networks at faster speeds.

In subsequent quarters last year, the company announced more profit warnings because of declining sales of its traditional voice products and on bad loans to emerging telecommunications carriers that couldn't pay their bills. With the company rumored to be facing bankruptcy, Lucent in February secured $4.5 billion in loans to fund its business and avoid the potential reduction in its credit rating to junk status.

With the company in the throes of restructuring, most analysts believed Lucent was a year or two years away from profits. By holding merger talks with Alcatel, though, Lucent's top brass have apparently decided that selling the company might be a better quick fix.

Investors never warmed to the proposed nuptials between the telecom giants. Since reports of the deal first surfaced May 17, Lucent's stock has fallen as much as 16 percent to a low of $8.23 a share Tuesday--about one-tenth where it traded 18 months ago.

After peaking at more than $82 in December 1999, the stock slipped to $62.69 last July and then plunged to $5.50 last April. Alcatel's stock price fell 19 percent to an intraday low of $26.10 on Tuesday before closing at $27.41.

As Lucent once again strikes out on its own, many analysts agree that its good technology may be its saving grace.

"If it has a Lucent stamp, people still want it (and) still trust it; some engineers have worked with Lucent equipment their whole careers," said Rick Schafer, an analyst at CIBC World Markets.

The company's products command a major presence in the U.S. market. "Lucent's equipment is prevalent is every major carrier network," said Richard Shannon, an analyst at Epoch Partners.

Shannon also noted that Lucent's sliding fortunes have somewhat mirrored those of AT&T. "I might equate (Lucent) with AT&T, Lucent has a brand cache, but they don't command and control the market like they used to."

News.com's Sam Ames and Rachel Konrad contributed to this report.