Alcatel and Lucent Agree to Merge in $13.4 Billion Deal
The New York Times
April 2, 2006
By VIKAS BAJAJ
Alcatel of France and Lucent Technologies said today that they had
reached agreement on a $13.4 billion merger that would create a
French-American maker of telecommunications equipment with revenue of
$25 billion, 88,000 employees and phone company customers across the world.
The deal comes in response to the increasing competition that Western
telecommunications firms are facing from low-cost Asian manufacturers,
as well as the growing size and purchasing power of a few large
telephone companies. If Alcatel and Lucent are successful at combining
their far-flung operations, which analysts say will be a significant
challenge, it could prompt competitors like Ericsson, Nortel Networks
and Siemens to seek their own deals so they can keep up.
The combined company, which has yet to be named, would be based in
Paris, where Alcatel has its headquarters. Lucent’s legendary Bell Labs
research center would remain in Murray Hill, N.J. Serge Tchuruk,
Alcatel’s chairman and chief executive, would be the non-executive
chairman, and Patricia F. Russo, Lucent’s chairman and chief executive,
would become chief executive of the new company.
Executives said they would lay off about 9,000 people, or 10 percent of
their combined staff, in the next three years as part of an effort to
cut costs by $1.7 billion. The companies did not provide a geographic
breakdown of the job cuts, but they said the cuts would be spread out
fairly. Lucent also dismissed concerns of employees and retirees about
the fate of its pension plans, saying they were financially healthy.
The job cuts would be the first of numerous cross-cultural challenges
faced by the companies, said Gerald R. Faulhaber, a management professor
at the Wharton School at the University of Pennsylvania and a former
Bell Labs researcher. It may take the companies several years to combine
product lines, employee teams and executives dispersed around the world
who are used to different ways of doing business, he added.
“These are not going to magically fit together, particularly when you
have a cross-border merger,” Professor Faulhaber said. “Sometimes it’s
costly and takes time to resolve, and sometimes they never get resolved.”
Alcatel and Lucent ended earlier merger talks in 2001 after executives
could not agree on how to share control of the combined company. Since
then, both companies have cut tens of thousands of jobs as they
struggled to recover from the demise of many of their customers.
Under the deal, Lucent shareholders would receive 0.1952 of an Alcatel
American depository share for each Lucent share, valuing the company at
about $3.01 a share based on Alcatel’s closing stock price on Friday, or
about 4 cents less than Lucent’s Friday closing price. After the merger,
Lucent shareholders would own 40 percent of the combined company, with
Alcatel shareholders owning 60 percent.
To allay concerns about a foreign company having access to the secretive
work that Bell Labs does for American military and intelligence
agencies, the companies said they would create an independent subsidiary
that would be overseen by a board of three American citizens. Military
contractors in similar situations frequently use such corporate
structures to assure government officials that classified research is
not available to foreign powers.
A Lucent spokeswoman declined to say how big the subsidiary would be in
terms of revenue or employees.
In France, the company would assign European citizens to sit on the
board of Thales, a satellite manufacturer that Alcatel jointly owns with
the French government and other investors. Alcatel also said it was
continuing to negotiate a merger of its own satellite business with Thales.
The combined Alcatel and Lucent board would have 14 directors, including
six members each from Alcatel and Lucent, some of whom are already on
their current boards; Mr. Tchuruk and Ms. Russo would be among those
six. The boards of both companies would also jointly appoint two new
directors who are European to add more international diversity, Mr.
Tchuruk said on a conference call with reporters and analysts today.
Lucent and Alcatel executives said the merger would create a
research-and-development powerhouse with a leading position in the two
fastest-growing areas of telecommunications – wireless and broadband
Internet access. “This is an R.& D.-intensive industry and competition
is increasing, and size and scale really matter,” Ms. Russo said.
Mr. Tchuruk said that the companies’ sales were divided in thirds among
Europe, North America and the rest of the world. “There is practically
no customer large or small that is not being reached by Alcatel and
Lucent,” he said.
As measured by revenue, the combined company would be slightly bigger,
but far less profitable, than Cisco Systems, the maker of Internet
routers and related equipment.
The deal was approved by the boards of both companies over the weekend
and is expected to close in 6 to 12 months. It has to be approved by the
companies’ shareholders and regulators in Europe and the United States,
including the Committee on Foreign Investment in the United States,
overseen by the Treasury Department, and the Justice Department’s
antitrust division.
Though lawmakers in Congress have so far not expressed significant
concerns about the deal, some experts say the merger could face scrutiny
given Bell Labs’ legacy.
Created in 1925 by AT&T as a research subsidiary, Bell Labs has helped
develop a wide range of commercial and military technologies, from the
transistor to ballistic missiles. The labs became a part of Lucent when
the company was spun out of AT&T in 1996.
There could be other problems in Washington given the rise in
protectionist sentiments, as demonstrated by the furor over a Dubai
company’s proposal to take over terminal operations at six American ports.
The French government is expected to take a more accommodating position
given that the combined company would be based in Paris. It would,
however, take longer to cut jobs in Europe, where worker protections and
unions are stronger.
The Lucent Retirees Organization, a group that represents former
workers, has expressed concerns about the merger’s impact on the
company’s pension plans, saying it would ask the government to oppose
any deal that does not include independent oversight of retiree benefits.
Lucent officials said today that with assets of $34 billion, the
company’s pension plans were overfunded by $3 billion, and that it did
not believe it would have to contribute to the funds until 2008.
But the retirees’ group said the surplus was entirely in the pension
plan for union retirees, while the plan for about 50,000 management
retirees was underfunded by about $1.2 billion. “We are not fighting the
merger,” said Ken Raschke, the group’s president. “All we are saying is
we want protection from it.”
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http://www.nytimes.com/2006/04/02/business/