Spartanburg Herald Journal , SC
March 25 2006

The Splice That Binds Two Giants

By KEN BELSON
New York Times
Published March 25, 2006

This article was reported by Ken Belson, James Kanter and Andrew Ross
Sorkin and was written by Mr. Belson.

For Patricia F. Russo, pulling Lucent Technologies back from the
brink of bankruptcy has not been enough.

As chairman and chief executive of the company, the nation’s biggest
telecommunications equipment maker, she has been under pressure for
the last two years to find a long-term solution for its troubles. On
Thursday, it became clear that a $13.6 billion deal with Alcatel of
France itself a survivor that has made a comeback in the turbulent
global telecommunications industry was perhaps the only viable option
left.

Ms. Russo, who took the helm at Lucent in 2002, defied skeptics by
returning the company to profitability by cutting thousands of jobs,
eliminating billions of dollars in debt and promoting wireless
technology. But righting a ship and driving it full steam ahead are
two very different things.

For all her efforts, Ms. Russo has been outflanked by her competitors
who moved faster into new fiber optic technologies and by rapid
consolidation among her customers in the phone industry. Under these
circumstances, many analysts have predicted that it was only a matter
of when, not whether, Ms. Russo would seek a merger. The transaction,
which the companies characterized as a merger of equals, could be
announced as soon as Monday.

But no matter how the deal is labeled on Wall Street or in
Washington, the new entity will face many hurdles. The
telecommunications landscape has been swept by ever larger mergers
including AT&T’s plan to buy BellSouth, announced this month creating
fewer clients with more leverage to demand cheaper equipment prices.

At the same time, up-and-comers from Asia like Huawei have been
cutting prices steeply to break into new markets. These newcomers
have been able to compete with old-line manufacturers because of the
broad shift toward equipment that runs on open standards, not the
proprietary technology sold by Lucent, Nortel and others.

This shift has allowed AT&T and other big carriers to sidestep Lucent
and buy equipment directly from low-cost makers in places like Taiwan
or China.

Still, analysts and investors were upbeat about the merger because by
teaming up, the companies could reduce their costs by consolidating
some of their operations. For Alcatel, a merger would bring Lucent’s
very profitable C.D.M.A. wireless technology used by Verizon
Wireless, Sprint Nextel and others. Alcatel could take advantage of
Lucent’s long relationships with the Bell companies. The companies
could also combine their fiber optic units and perhaps gain enough
power in the market to reverse the long decline in prices. Lucent
shares rose 24 cents, to close at $3.06 yesterday. The deal is not
expected to include a premium on Lucent’s market value. Alcatel’s
American depository receipts rose 25 cents, to close at $15.70.

The details of the possible deal continued to trickle out early
yesterday.

Ms. Russo, 53, would be chief executive of the combined company,
people close to the discussions said. The enlarged entity would have
its “executive office” in Paris, though it would continue to have
major operations in both the United States and France. Its board
would be split evenly between the merger partners.

Alcatel is not a new player in the North American market. In fact,
since the mid-1980’s it has considered itself more of a global
company than a French one, even adopting English as the official
language for its multinational staff.

Most notably, Alcatel, like Lucent, has had to recover from a dire
business downturn just a few years ago. The company, led by Serge
Tchuruk, 68, an English-speaking French citizen of Armenian heritage
who became chairman and chief executive of Alcatel in 1995, has also
cut thousands of jobs in recent years.

In 1998, Mr. Tchuruk got a harsh lesson when the stock plunged 38
percent in a day after he said earnings would miss analysts’
estimates. He began cutting costs and focusing on the core
businesses. The global work force, once 115,700, is now 58,000, with
most of the layoffs outside France.

Mr. Tchuruk, who is expected to retire as chief executive in May and
remain as nonexecutive chairman, also shed unprofitable divisions
like mobile phones to focus on network sales to developing markets
and sales of high-speed Internet equipment and digital subscriber
lines.

Those efforts, many analysts say, allowed Alcatel to survive when the
telecommunications sector crashed in 2000. In 2005, Alcatel recorded
net profit of about $1.12 billion.

The company generates 15 percent of its sales in North America and 15
percent in Asia, compared with 12 percent in France. Only one French
company France Télécom is among its 10 biggest customers.

Analysts said the two companies, which had merger talks in 2001, were
a good fit, combining the growing reach of Alcatel in
developing-world markets and its leadership in broadband equipment,
fiber optic networks and Internet television with Lucent’s strength
in the wireless equipment market in the United States, where Alcatel
is seeking growth.

Lucent, under Ms. Russo’s direction, has also pushed forward with
next-generation technology like IP Multimedia Subsystem, or I.M.S.,
which is intended to integrate wireless and fixed-line networks. AT&T
and Cingular, for instance, have signed contracts to work with
Lucent.

“I look at the deal with Alcatel and I think it’s chocolate and
peanut butter, they fit so perfectly,” said Paul Sagawa, who covers
Lucent for Sanford C. Bernstein, an investment research company, in
New York.

A merger with Alcatel would be the final unraveling of Lucent, a
highflier whose stock once traded over $63 a share, in 1999. It has
been through so much already, including losing more than two-thirds
of its revenue since 1999.

With its customers the Bell companies and the big wireless carriers
consolidating, “the only way to respond is not to compete but to
merge,” said Richard Nespola, the chairman and president of the
Management Network Group, a telecommunications consultant.

The merger would not necessarily mean significant job cuts at Lucent,
analysts said, because deep cuts could potentially harm Lucent’s
leadership in the wireless equipment market and its long
relationships with the Bell companies. Any future layoffs, they said,
would probably be at headquarters rather than in operational jobs.

On Lucent’s sprawling corporate campus in Murray Hill, N.J., Lucent
employees were adopting a wait-and-see attitude about the merger.

Sophia Tsai, who works in the new- product introduction department,
said she had received an e-mail message from Ms. Russo, discussing
the possible merger without going into detail.

Ms. Tsai, like others interviewed, recognized that the merger could
mean layoffs and department mergers.

“It is possible that this is a merger of equals, and Lucent will
remain in control,” she said. “We have a strong leadership here.
There might be some changes. It depends on who takes the lead.”

George M. Calhoun, a professor at the Stevens Institute of
Technology, said that “looking at the size of both companies, there’s
no doubt Alcatel will be the Daimler and Lucent will be the
Chrysler.”

But, he added, “keeping Pat in her position will reassure” Lucent’s
customers who are “scratching their heads whether they are going to
have to deal with new people. ”

Mr. Calhoun also said that naming Ms. Russo as chief executive of the
proposed merged company might give Alcatel access to government
contracts that foreign companies were typically prohibited from
bidding on.

But Steve Kamman, an analyst at CIBC World Markets, said regulators
and lawmakers could have “serious concerns” about an Alcatel-Lucent
deal because Bell Labs, Lucent’s research arm, has worked closely
with various security agencies. This could lead to a long and
potentially contentious approval process, he said.

A Lucent spokesman, William Price, said company executives were not
available for comment yesterday.

Over all, nearly half of Lucent’s revenue now comes from wireless
equipment, up from 37 percent two years ago. At the same time, sales
from wireline equipment have been shrinking and now make up a quarter
of revenue, down from 37 percent in 2003. As for new products like
I.M.S. technology, which Lucent hopes to rely on, the markets are not
large and may take years to grow.

In the meantime, Mr. Kamman said, “the whole industry is a
fixer-upper.” Ten years ago, he said, “this would have been
earth-shattering, but the forces in play are so enormous that this
merger is underwhelming.”