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Commentary: Lucent merger wouldn't fix problems

Although a merger between Alcatel and Lucent would have benefited some, it would likely not have solved the difficulties that led the companies to contemplate the deal in the first place.

By Tim Smith and Lawrence Orans, Gartner Analyst Although a merger between Alcatel and Lucent Technologies would have provided incremental benefits to the vendors, it would likely not have solved the difficulties that led them to contemplate the deal in the first place.

The merger was clearly targeted at the service provider market--rather than at the enterprise market--and would have created the largest vendor in the market. In fact, the combined company would have generated revenue of $47.4 billion in 2000 compared to the next largest company, Nortel Networks, at $29 billion.

The key benefit to Lucent from such a merger would have been some relief from short-term financial woes. The key benefit to Alcatel would have been an immediate position in the North American service provider market--an objective that has so far eluded it. Although the deal would have benefited the vendors by increasing their size and thus enabling them to save on administrative, R&D and other costs, they would have had to sort out massive product overlaps.

See news story:
Lucent, Alcatel end merger talks
In addition, both companies have 100-year-old business cultures, so melding the two while retaining key personnel would have proven difficult. A merger would likely have needed a significant amount of time before coming to grips with the immediate problems of both vendors: relatively low profit margins, massive debt and major units with business models in long-term decline. Gartner believes that those issues would have created enough confusion to erode, rather than enhance, the combined company's competitive position.

Lucent remains in financial difficulty and has hopes for an upswing in the market so that network service providers will start buying its products again. As its main asset, Lucent remains a prominent supplier to the regional Bell operating companies, which the economic slowdown has least affected, and Lucent can still mine its customer base for a little while because it has some good products.

For the long term, however, Lucent must break through with a next-generation product set, or the market will pass over Lucent in favor of rivals such as Cisco Systems and Nortel. Lucent has had opportunities to make the leap--for instance, with its acquisitions of Ascend Communications, Chromatis, Spring Tide and Nexabit--but has yet to capitalize fully.

As a result, Lucent still holds the top market share in high-end multiservice switches and access products (that is, ATM (asynchronous transfer mode) switches and access products), a middle-of-the-pack share in optical technology, and a solid position in DSL (digital subscriber line) access products. But it has no position in edge and backbone IP routing products.

The primary challenge to Lucent remains finding a way to capitalize on its considerable intellectual capital (in the form of Bell Labs) by quickly turning solid R&D assets into commercially attractive products. This challenge becomes all the more difficult with today's economic conditions and Lucent's own financial difficulties.

Alcatel has some good products but wants to become a one-stop shop. Alcatel tried to target the enterprise by acquiring vendors with strong technology (such as Packet Engines and Xylan) but has done little with them. Therefore, Alcatel continues to struggle with establishing a credible beachhead for its enterprise data products, particularly in North America. A merger with Lucent would have given Alcatel a large customer base in North America in which to sell its other products.

With the deal's demise, Alcatel must find another strategy to crack that important market. Like Lucent, Alcatel faces pressure to improve its financial performance quickly. It announced a quarterly loss of about $2.5 billion (3 billion euros) shortly after the talks with Lucent broke down.

(For related commentary assessing Lucent Technologies, see registration required.)

Entire contents, Copyright © 2001 Gartner, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.