Copyright 2006 TheStreet.com, Inc.
TheStreet.com
March 24, 2006 Friday 10:10 AM Eastern Time
By Chris Nichols, Deputy Managing Editor
From Lexis Nexis

Wall Street awoke Friday to news of merger talks between Lucent (LU:NYSE) and Alcatel (ALA:NYSE), a deal that would unite two fierce competitors in the shifting market for telecom equipment.

Lucent, whose dramatic rise and fall during the Internet boom made it a poster child for the era’s excesses, confirmed that it is holding talks to merge with its French rival. The transaction is being billed as a merger of equals even though Alcatel’s $20 billion market cap is about 40% greater than Lucent’s.

The statement said the companies are aiming to price the deal “at market.” Shares of Lucent, whose stock market value is about $12 billion, closed at $2.82 Thursday and were up 29 cents, or 10%, to $3.11 in early Instinet trading. Alcatel added 54 cents, or 3.5%, to $15.99 Friday.

Goldman Sachs raised Lucent to in line from underperform Friday.

Lucent said there was no assurance an agreement would be achieved and vowed no further communications on the matter until a deal is reached or talks break down.

Word of the deal comes amid a wave of consolidation among telecommunications carriers and the companies that supply them. Earlier this month, AT&T (T:NYSE) struck a $67 billion agreement to acquire BellSouth (BLS:NYSE), a deal designed in part to put pressure on equipment suppliers.

Wrote American Technology analyst Albert Lin in the aftermath of the AT&T announcement: “It is not likely that the equipment industry is going to see better growth prospects postmerger in most categories when compared to the buying of the two companies individually.”

Ironically, Alcatel was one of the few suppliers to be considered a winner in the BellSouth transaction. The company was selected by AT&T predecessor SBC to provide $1.7 billion in broadband equipment for a fiber optic expansion, and was believed to be in line to collect similar business from BellSouth.

But such jostling is meager consolation in the increasingly overpopulated telecom-equipment space. Both Lucent and Alcatel have battled the encroachment of myriad competitors like Tellabs (TLAB:Nasdaq), Redback (RBAK:Nasdaq) and Juniper (JNPR:Nasdaq).

Disappointment has been a fact of life for Lucent shareholders, who saw their dreams of a revival shattered in January when the company previewed a sales miss in both the first quarter and full-year. It cited weakness both at home and in China.

Between Lucent and Alcatel, Lucent is the smaller in terms of revenue. For the fiscal year ended Sept. 30, the company had $9.44 billion. Alcatel’s 2005 sales were about $15.7 billion. Previous merger talks between the two companies broke off in 2001 over the issue of who would control the company following the transaction.

The deal could also face a thorny regulatory landscape. France hasn’t historically welcomed linkups with U.S. firms, and nationalist issues have occasionally turned up in the telecom space, where voice and data transmission sometimes broaches privacy concerns.

Checkered Past

AT&T spun off Lucent in 1996, and as the world became more connected and dependent on the communications industry, demand for its offerings soared.

Like many companies involved in the quest to network the planet — the JDSUs (JDSU:Nasdaq), Ciscos (CSCO:Nasdaq) and Nortels (NT:NYSE) — Lucent saw its shares skyrocket and grow to be widely held by both institutional and retail investors.

For a time, Lucent was the most-owned stock in the U.S., and it’s still regularly among the heaviest-traded at the New York Stock Exchange.

When the Internet party came to its end, Lucent’s fortunes tracked so many of its contemporaries: profit warnings piled up, its share price tumbled, thousands of employees were axed and stockholders hit it with lawsuits to try to recapture some of the billions they had lost.

At its zenith, Lucent fetched more than $60 a share, adjusted for stock splits and dividends. At its worst, the stock sold for less than $1 in 2002.

From late that year to the present day, the stock has essentially been mired between a dollar and change and $4; it hasn’t seen a double-digit price tag since 2001. Shares of Lucent closed Thursday at $2.82, and Alcatel finished at $15.45.