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Lucent, Alcatel Are Far Along In Merger Talks
Linkup of Telecom Suppliers Would Add to Rapid Pace Of Industry Consolidation
By DENNIS K. BERMAN, SARA SILVER and ALMAR LATOUR
Staff Reporters of THE WALL STREET JOURNAL
March 24, 2006

Lucent Technologies Inc. and France's Alcatel SA said they were in advanced talks on a merger that would create a trans-Atlantic equipment supplier with a market value of $33 billion in the rapidly consolidating telecommunications industry.

A linkup between the two, anticipated since a deal attempt failed five years ago, could help both realize substantial cost savings and likely would kick off a new round of consolidation among the already-pressured companies that supply equipment to phone companies.

Lucent Technologies Chief Executive Patricia Russo would be the chief executive of the combined company, people familiar with the matter said. And the two firms would have equal representation of a new board of directors, these people add.

Given the cultural and logistical challenges, moreover, a merger could prove to be among the more complicated recent couplings in the industry. With protectionist sentiment growing in both the U.S. and Europe, a merger could prove a critical test of cross-border cooperation for the French and U.S. governments.

In a joint statement late yesterday, the companies said: "We can confirm that Lucent and Alcatel are engaged in discussion about a merger of equals that is intended to be priced at market. There can be no assurances that any agreement will be reached or that a transaction will be consummated. We will have no further comment until an agreement is reached or the discussions are terminated."

Many details were unclear, including just how the two companies might pull off a "merger of equals" when they have such divergent valuations. Lucent has a market value of $12.6 billion, while Alcatel's market capitalization is $20.2 billion. The disparity suggests a deal may be structured as an acquisition of Lucent by Alcatel.

Consolidation pressure has been growing in the equipment business amid a wave of telecom deals and the emergence of more-efficient technologies. That has limited the amount of money that big phone companies have to spend on equipment. The result has been too many equipment makers chasing a limited amount of business.

The industry's biggest suppliers -- which include such companies as Nokia Corp. and Motorola Inc. -- compete for contracts in nearly every corner of the globe, from Latin America to China. But their primacy in some markets is waning as suppliers from China flood into the developing world offering cut-rate equipment.

At the same time, the technology of transmitting phone calls, Internet data and TV signals often is regarded as a national resource to be protected from foreign meddling, and a Lucent-Alcatel deal could draw close scrutiny.

Lucent's telecom switches, for instance, are in phone hubs around the U.S. -- and are subject to routine wiretapping and monitoring of law enforcement. It also runs Bell Labs, a decades-old institution descended from the old AT&T Corp. that is the force behind some of the most innovative U.S. research into communications.

By merging with Lucent, Alcatel would greatly expand its presence in the U.S. market. Alcatel already is the world's leading seller of "digital subscriber line," or DSL, equipment, which U.S. phone companies have been buying to expand their broadband businesses. Lucent would give it a major share of the U.S. wireless-equipment market as well. Lucent is a leading maker of the technology used by several major carriers including Verizon Wireless, a joint venture between Vodafone Group PLC and Verizon Communications Inc., and Sprint Nextel Corp.

Telecom has seen a massive wave of consolidation during the past two years, with the announced value of U.S. deals alone exceeding $200 billion. Most recently, AT&T Inc. announced plans to buy BellSouth Corp. for $67 billion. Other transactions have included Verizon's acquisition of MCI Inc., and the earlier purchase of AT&T by SBC Communications Inc., which took the AT&T name.

The backdrop is a flood of new technologies and new competitors that have driven down the prices of traditional phone services while introducing a host of new services that are dramatically changing the way consumers and businesses communicate. While phone service over the Internet is taking off, for instance, the cable industry is making a big grab for the traditional residential landline business of telephone companies like Verizon and AT&T. In turn, phone companies are starting to offer television service over upgraded networks.

The changes are creating opportunities for some equipment makers. But they also pose challenges because improved efficiency enables carriers to replace huge switches and other pieces of equipment with computers and software.

There already has been some merger-and-acquisition activity in the equipment business. In October, Telefon AB L.M. Ericsson of Sweden agreed to acquire Marconi Corp., of London. In February, Cisco Systems Inc. completed an acquisition of Scientific-Atlanta, giving it a major beachhead in the cable TV, video-on-demand and emerging Internet television businesses. Motorola has plans to spend up to $1 billion to buy small companies.

Lucent, of Murray Hill, N.J., and Alcatel have come close to merging before. In the spring of 2001, they were on the verge of a $23.5 billion deal, hammered out among executives in a 16th-century castle outside of Paris. But Lucent, which had initiated the conversations, ultimately backed out because its management felt the deal was turning into a takeover rather than a merger of equals.

Shortly after the 2001 merger's collapse, Serge Tchuruk, Alcatel's chairman and chief executive, said the company's goal of becoming a bigger player in the U.S. market remained "absolutely essential." Alcatel has acquired a number of smaller U.S. data-networking players, but an acquisition of Lucent would be by far its largest deal here.

Of late, Alcatel's financial performance has been stronger than that of Lucent. In 2005, Alcatel posted sales of 13.1 billion ($15.8 billion), up from 12.2 billion in 2004, and net income of 930 million, compared with 576 million in 2004. After suffering with other equipment manufacturers from the telecom meltdown, it has been making a steady comeback thanks in part to streamlining, job reductions and asset sales. Mr. Tchuruk also has been trying to broaden the company's client base beyond the telecom industry.

Lucent's Ms. Russo also has been credited with a turnaround after the turmoil of the telecom bust, producing two years of stable growth partly by expanding in emerging markets. But most of the profit Lucent generated actually came from credits in its overfunded pension plans, not from operations. In its first fiscal quarter in 2006, the company booked a net loss of $104 million and a 12% decline in sales. Company officials said an anticipated increase in demand from telecom carriers didn't materialize at the end of last year.

--Shawn Young contributed to this article.

Write to Dennis K. Berman at dennis.berman@wsj.com, Sara Silver at sara.silver@wsj.com and Almar Latour at almar.latour@wsj.com

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