PARIS/ALKHOBAR, 4 April 2006 — Alcatel and Lucent Technologies have entered into a definitive merger agreement to create a global communications solutions provider with the broadest wireless, wireline and services portfolio in the industry. The primary driver of the combination is to generate significant growth in revenues and earnings based on the market opportunities for next-generation networks, services and applications, while yielding significant synergies. Basically the new company will work to capitalize on fast-growing telecom offerings such as “triple play” — Internet, telephone and TV packages.
While the deal is being portrayed by the two companies as a “merger of equals” most analysts believe that Lucent was “desperate” for this agreement. If the expected synergies are achieved the merger will create a global player better able to land deals in the international telecom equipment market. However, this will only be possible if the new company finds ways to maintain the agility that Serge Tchuruk, chairman and CEO of Alcatel, created when he transformed an old-fashioned French engineering company into a cutting-edge telecom equipment provider. For Tchuruk who has been planning for some time to retire in June, this may be his finest hour. Shares in Alcatel surged when trading opened yesterday.
“This combination is about a strategic fit between two experienced and well-respected global communications leaders who together will become the global leader in convergence,” said Tchuruk, who will become non-executive chairman of the combined company. “A combined Alcatel and Lucent will be global in scale, have clear leadership in the areas that will define next-generation networks, boast one of the largest research and development capabilities focused on communications, and employ the largest and most experienced global services team in the industry. It will create enhanced value for shareholders of both companies who will benefit from owning the most dynamic, global player in the communications industry.”
Patricia Russo, chairman and CEO of Lucent, who will become CEO of the combined company, said: “The strategic logic driving this transaction is compelling. The communications industry is at the beginning of a significant transformation of network technologies, applications and services — one that is projected to enable converged services across service-provider networks, enterprise networks and an array of personal devices. This presents extraordinary opportunities for our combined company to accelerate its growth. The combination creates a new industry competitor with the most comprehensive portfolio that will be poised to deliver significant benefits to customers, shareowners and employees.”
The combined company, which will be named at a later date, will have an aggregate market capitalization of approximately $36 billion. Based on calendar 2005 sales, the combined company will have revenues of approximately $25 billion, roughly matching Cisco Systems and significantly more than L.M. Ericsson’s $19.9 billion. As of Dec. 31, 2005, the combined companies had about 88,000 employees.
The tie-up will generate $1.7 billion in savings within three years, the companies said. The savings will come from several areas, including consolidating support functions, optimizing the supply chain and procurement structure, leveraging R&D and services across a larger base, and reducing the combined worldwide work force by approximately 10 percent. It is expected that most of those savings will be achieved in the first two years. The merger also will result in approximately $1.7 billion in new cash restructuring charges, with the charges to be recorded primarily in the first year.
The companies put forward positive benefits from the merger which include:
• Deep and strong, long-term relationships with every major service provider around the world.
• A growing momentum in high-end enterprise technologies and markets, including mission critical safety and security applications.
• R&D capabilities, including Bell Labs, with 26,100 R&D engineers and scientists throughout the world.
• An enhanced global footprint and diversified customer base with a presence in more than 130 countries.
Overview of the Transaction: Under the terms of the agreement, Lucent shareowners will receive 0.1952 of an ADS (American Depository Share) representing ordinary shares of Alcatel (as the combined company) for every common share of Lucent that they currently hold. Upon completion of the merger, Alcatel shareholders will own approximately 60 percent of the combined company and Lucent shareholders will own approximately 40 percent of the combined company. The combined company’s ordinary shares will continue to be traded on the Euronext Paris and the ADSs representing ordinary shares will continue to be traded on the New York Stock Exchange. The transaction is expected to be completed in six to 12 months. Until the merger is completed, both companies will continue to operate their businesses independently.
The combined company created by this merger is incorporated in France, with executive offices located in Paris. The North American operations will be based in New Jersey, USA, where global Bell Labs will remain headquartered. The board of directors of the combined company will be composed of 14 members and will have equal representation from each company, including Tchuruk and Russo, five of Alcatel’s current directors and five of Lucent’s current directors. The board will also include two new independent European directors to be mutually agreed upon. The combined company intends to form a separate, independent US subsidiary holding certain contracts with US government agencies. This subsidiary would be separately managed by a board, to be composed of three independent US citizens acceptable to the US government.
Alcatel is attempting to transfer its satellite unit, Alcatel Alenia Space to France’s Thales in exchange for a larger stake in Europe’s biggest defense electronics company. Whether or not that deal goes through, the combined company will remain the industrial partner of Thales and a key shareholder alongside the French state.
With the merger between Alcatel and Lucent, several analysts are predicting a flurry of other mergers and/or acquisitions to take place in the next year or two. Yankee Group also expects major structural changes in the industry, which, it says, will overlap with the transition and integration period for the Alcatel and Lucent merger.
According to Yankee Group, “These structural changes are being driven by carrier consolidations and an equipment market that has become increasingly competitive with the entrance of new low-cost global competitors. In addition, disruption by rapid technology change has created greater vulnerability with vendors.”
Merrill Lynch analysts Tal Liani and Vivak Arya expect consolidation to be the only way for current players to compete. “We see Ericsson, Motorola or Siemens as potential buyers, and believe that ECI, CIENA Corporation, Extreme Networks, Foundry Networks, Juniper Networks, Redback Networks Inc. and Hammerhead Systems Inc. are possible acquisition targets, since they are operating in the growing segment in wireline communications,” they wrote in a recent report.
What does the Alcatel/Lucent merger mean for the Middle East and Saudi Arabia?
“Alcatel and Lucent represent a unique business combination of two companies that share the same vision and that will benefit from an excellent geographic, product portfolio and customer fit,” said Vincenzo Nesci, VP, Alcatel ME. “In the Middle East, where Alcatel has an extremely strong presence and major footprints in countries such as Egypt, Saudi Arabia, Jordan, Pakistan, Qatar and the Emirates, the combined people, capabilities and customer relationships will enhance this competitive standing and will give us the possibility to reinforce, at regional level, our role as the world’s leading global communications solutions provider.”
He continued, “For the past four years, Alcatel has been focusing on enhancing its presence in the Kingdom, by developing, with its major customers such as STC, Mobily and Saudi Aramco, a relationship based on partnership and long-term cooperation and commitment. This trend will continue, giving us the possibility to further develop local capabilities.”
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