Lucent and Alcatel in merger talks

Merger would help fend off competition from rival equipment makers

Faced with a challenging industry environment, telecommunication equipment makers Lucent Technologies and Alcatel are discussing a possible merger, according to a statement released by the two companies.

"We can confirm that Lucent and Alcatel are engaged in discussions about a potential merger of equals that is intended to be priced at market," the statement said, adding that there is no guarantee the companies will reach an agreement.

"We will have no further comment until an agreement is reached or the discussions are terminated," it said.

A merger between Alcatel and Lucent would help them to fend off competition from rival equipment makers like Huawei Technologies and ZTE, which are looking to take market share from the more established players, said Bertrand Bidaud, vice president of carrier operations and strategy at Gartner.

"They are operating in a business segment where there is no growth and more and more competition," he said.

A deal makes sense because there is not much overlap between the customer bases of the two companies, Bidaud said. While Lucent is very strong in North America, Alcatel is strong in other regions, including Europe and Asia, he said.

"There's a good strategic fit if you look at it that way," Bidaud said.

Lucent has been trying over the past couple of years to win more business in Europe, said John Marcus, an analyst with Current Analysis, "but they haven't really been able to crack the Alcatel and Siemens strongholds," he said.

Alcatel and Lucent might also produce a strong services business, a recent focus for both, Marcus said. Around 30 percent of Lucent's sales in Europe comes from professional and managed services, higher than its global average of 25 percent or the industry average of 15 percent, he said. Alcatel's services earnings are slightly higher, and its focus on IP network transformation would nicely complement Lucent's maintenance and support services work, he said.

One source of service revenue growth is the management of telecommunications networks for operators. Last year 3 Group, a division of Hutchison Whampoa, awarded Telefonaktiebolaget LM Ericsson a 15 billion Swedish krona ($1.9 billion) contract to operate its network in Italy, and another, more valuable, contract for the operation of its U.K. network.

In addition, the companies would benefit by combining their research and development (R&D) budgets, which increases the chance they will develop a "hit product," Bidaud said.

From a competitive standpoint, a Lucent and Alcatel merger is likely bad news for Siemens and Ericsson, two vendors with strongholds in Europe, Marcus said. Siemens and Ericsson have similar strengths to Lucent, so a stronger Lucent offers a greater competitive threat to them, he said.

Lucent and Alcatel reported multi-billion dollar earnings in their most recent annual financial statements.

Alcatel's revenue for the period from January to December 2005 was €13.1 billion ($15.6 billion), up 7 percent, with net profit of €930 million, up 61 percent on the same period a year earlier. Lucent reported revenue of $9.4 billion, up 4 percent, and profit of $1.2 billion, down 41 percent, for its fiscal year from October 2004 to September 2005.

Lucent and Alcatel have been down this road before.

In 2001, the two companies held discussions over a possible merger, but the talks ended without an agreement. At the time, reports suggested the talks failed because Lucent had insisted on a merger of equals, with both sides having an equal number of representatives on the combined company's board of directors.

Lucent and Alcatel did not disclose the reasons for ending the 2001 talks.

Nancy Gohring, in Dublin, contributed to this report.