Alcatel, Lucent Merger Bid Fails

Electronic News, June 4, 2001 by Steven Fyffe

Companies wrestle with control, duplication and antitrust problems

Merger talks between Paris-based Alcatel SA and Lucent Technologies Inc. collapsed last week. Lucent (nyse: LU) backed out of the deal, worth $22.8 billion in stock, at the last minute after Alcatel refused to budge on conditions that would have given it a controlling position on the merged company's board, according to reports from The Wall Street Journal. The companies issued a joint release on Tuesday saying talks had been terminated.

If the sale had gone through, it would have created a telecommunications behemoth one analyst described as the "New World Bell Labs." One of the biggest problems with the proposed merger was the duplication in the two companies' product lines, said John Manzur, principal analyst of optical networking at Gartner Dataquest, San Jose. "The problem that we saw was both companies had a lot of traditional products in their portfolio that overlapped significantly, and it would be a logistical nightmare to decide which ones they would retain," Manzur said.

The megamerger could also have raised some antitrust issues, said Sean Lavey, senior analyst at International Data Corp., Framingham, Mass. Alcatel (nyse: ALA) alone controls about 40 percent of the DSLAM market. With Murray Hill, N.J.-based Lucent under its wing, the merged company would have had a near-monopoly position, cornering 50 percent to 60 percent of the market, Lavey said. "If they have that much of the market, there are antitrust issues that could put a wrench in this whole deal," he said. Other overlapping areas include wireless base stations, WAN infrastructure and the DSL market in general, Lavey said.

National security concerns were even cited by critics of the deal. Lucent is said to be currently working on some research projects on behalf of the U.S. government, according to Lavey.

For chipmakers one major concern was that a combined Alcatel-Lucent would have enough buying clout to bid down component prices. But the giant market splash of such a merger would only send tiny waves into the chipmakers' corner of the pond, said Jeremey Donovan, principal analyst at Gartner Dataquest. "The combination of Alcatel and Lucent would have buyer power, so they could potentially put pressure on component vendors," Donovan said. "Alcatel's big, and Lucent's big, but the combination really doesn't change things all that much for the component vendors," he said. "There's impact in the system world, and there's impact to their customers who buy their equipment, but down the food chain to the component suppliers, it's not a big deal."

Although merger talks have collapsed, the door is still open for further negotiations between the two companies, according to media reports. At this stage, Alcatel is more likely to pursue smaller, more manageable takeovers, Manzur said. "Do you buy three slices of pizza, or do you buy the whole pie? Alcatel's still hungry, and they are still interested in Lucent's (optical) fiber business, but I think they are more likely to go out and buy three slices, rather than go for the whole pie and get indigestion, at this point."

Cisco Systems would make a better partner for Lucent, Manzur said.