Alcatel, Lucent In Merger Talks

SAN JOSE, Calif. — In what could be the latest blockbuster in the communications market, Alcatel SA and Lucent Technologies Inc. late Thursday (March 23) confirmed that the two companies are in merger talks.

The deal could potentially create a communications powerhouse, with combined sales of more than $25 billion.

"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," according to a statement issued by the companies.

"There can be no assurances that any agreement will be reached or that a transaction will be consummated," according to the companies. "We will have no further comment until an agreement is reached or the discussions are terminated."

The communications market has already seen one mega-merger in 2006. Earlier this month, AT&T Inc. acquired rival BellSouth Corp. for $67 billion.

Franced-based Alcatel and U.S.-based Lucent are no strangers to each other. In 2001, the companies were on the verge of a $23 billion merger, but the talks fell apart.

Both Lucent and Alcatel have changed in significant ways since their 2001 merger attempt, in dimensions that go beyond mere contraction in size. Lucent spun off its enterprise voice products as Avaya, as well as microelectronics products in the group that later became Agere Systems Inc. Optical transport products were reduced to those emphasizing add-drop multiplexing and multi-service switching, with the highly-touted Lambda router cross-connect dropped from Lucent's portfolio.

Lucent expanded its metro routing products, first with a Juniper alliance, and later by acquiring Riverstone Networks Inc. assets from bankruptcy court, with the latter routers and switches won in a bid against Ericsson on March 20.

Alcatel pulled together a range of enterprise and metro-carrier products for Internet Protocol switching, ranging from the 1999 acquisition of Ethernet switching company Xylan, to the 2003 acquisition of service-router startup TiMetra Networks. Both companies place more emphasis on IP routing and IP Multimedia Subsystem platforms, reflecting the phasing out of time-division multiplexed technology in public networks.

Because the Lucent and Alcatel products address a smaller sector of the overall networking market, a merger may have an easier time being approved by both the U.S. Justice Department and European Union.

However, the similarity in consolidations both companies implemented in the 2001 to 2006 time frame means that a combined Alcatel-Lucent would need to prune overlaps in their product lines, particularly in DSL access multiplexers and mid-sized routers.

After spinning off from AT&T in 1996, Lucent was once a high flyer in the booming communications equipment market. But the company has fallen on hard times. In January, Lucent reported a first-quarter loss of $278 million as sales fell $21 million from a year earlier to $2.05 billion, due to the slumping China market.

Lucent lowered its fiscal 2006 year guidance, calling for revenue to increase in the low single digits rather than mid single digits as forecast previously.

Alcatel recently paid its first dividend in four years on the back of better-than-anticipated profits at almost all of its divisions, but in particular broadband access and mobile infrastructure.

Fourth-quarter profits jumped to 541 million euros ($655 million) from 466 million euros ($564 million) a year earlier. Sales rose 7.6 percent to 4.1 billion euros, and the operating margin climbed to 13.2 percent from 12 percent in the year-ago quarter.

For the year as a whole, revenues increased from 12.2 billion euros ($14.8 billion) in 2004 to 13.1 billion euros ($15.9 billion) last year.

The company said its results were helped by a turnaround in its fixed-line business on increased demand for "triple play" services that operators use to offer a mix of voice, data and video.

Loring Wirbel contributed to this story from Colorado Springs, Co.