A second attempt to merge telecommunications equipment maker Lucent Technologies Inc. and French rival Alcatel SA is a good strategy, and likely to trigger more combinations in the highly competitive industry, analysts say.
Telecom equipment makers seeking to boost profit and margins don’t have the clout to raise prices much and so must cut costs.
Still, a deal between Alcatel and Murray Hill-based Lucent is unlikely to lead to significant layoffs. Lucent already shed most of its work force during a long downhill slide and French corporate governance structures make layoffs there difficult, experts say. And the two companies are extremely well matched, with strengths that complement each other and very little overlap in their products and services.
“They go together like chocolate and peanut butter,” communications equipment analyst Paul Sagawa of Sanford C. Bernstein & Co. LLC said Friday.
Wall Street apparently shared that sentiment, with shares of both companies trading significantly higher instead of the more-usual pattern of one potential merger partner trading down and the other up.
The two companies said in a joint statement Thursday night that they are engaged in merger discussions, but said they would not comment further “until an agreement is reached or the discussions are terminated.”
Some analysts said the combination has been rumored for a while, along with pairings of other telecom gear makers, but Sagawa said he was surprised given the “bitterness both sides expressed the last time this deal fell apart.”
This time around, the companies are couching it as “a potential merger of equals” rather than an Alcatel acquisition, even though Alcatel has more revenues and employees. But Lucent is slightly more profitable and an equal partnership would be more palatable to the one-time Wall Street darling.
Meanwhile, some observers see more pressure these days for a combination creating a bigger company whose scale and array of products and services would bring more clout in negotiating deals with telephone companies and other customers, partly because of consolidation within the communications industry.
“What we’re seeing, I think, is a drive toward becoming a low-cost supplier,” said Alan Michel, professor of finance at Boston University School of Management.
George Calhoun, professor of business and technology at Stevens Institute of Technology in Hoboken, said he thinks Lucent needed more scale given that “every time they turn around, they’re looking at bigger, more powerful customers on the other side of the table.”
“They almost crashed and burned. They managed to recover, and I give them a lot of credit for that, but they took a beating” and had to give customers very favorable terms on prices and customer financing, Calhoun said.
A Lucent-Alcatel combination would change that equation and create the world’s biggest telecom equipment maker, one with customers and operations across most of the world and with strengths in a variety of technologies.
“Alcatel could dramatically expand its presence in the United States through this merger,” Michel said, because Lucent has a huge share of the U.S. market.
Lucent has gained momentum in recent U.S. sales and holds roughly 50 percent of the global market for its wireless telecom gear, for the CDMA standard favored in the United States, while Alcatel is a dominant player in the GSM wireless standard used in Europe and some other countries. Both are working on development of the next-generation technology, called WCDMA, Sagawa said.
“It costs a lot of money to keep the development going in that area, so (a merger) gives them the scale to do this competitively,” he said.
Of late, Lucent has been successful in winning contracts for wireless customers, while Alcatel has been grabbing deals for companies providing packaged Internet, phone and television services, Prudential Equity analyst Inder Singh wrote in a research report. He wrote that the merger makes more sense than when first explored in 2001, because of the need for consolidation in the equipment-making industry and the recent trend of telecom providers increasing their capital expenditures.
Meanwhile, if Lucent and Alcatel can’t complete a deal, “there might be other bidders,” mainly for Lucent, Michel said.