Alcatel, Lucent in merger talks again

Alcatel and Lucent are once again in merger talks, the two companies announced overnight.

According to the Reuters news service, the two telecom equipment giants are pursuing a merger of equals. Five years ago, a previous takeover attempt of Lucent by Alcatel failed.

This time around, a friendlier merger would create the largest global telecom gear maker, with market capitalization of $33.78 billion and combined sales of $25.33 billion, exceeding current market leader Cisco Systems.

An Alcatel-Lucent combo would probably also trigger another round of consolidation within the telecom equipment industry. Following the latest round of service provider mergers, industry analysts have agreed that there are too many equipment providers for all to succeed.

Although this merger was said to be of equals, Alcatel currently has the strongest market position and is positioned well in key growth markets, such as IPTV and broadband access. The company is the global DSL leader and in North America, has beaten both Lucent and Nortel to the punch with key customers such as AT&T. Alcatel is providing both equipment and major integration services to AT&T in its Project Lightspeed buildout and has partnered with Microsoft in delivering IPTV.

"The new company could have substantial purchasing power from suppliers," Morgan Keegan analyst Simon Leopold wrote in a note issued this morning. "However, considering the number of significant system competitors, we are unsure Alcatel-Lucent would gain much in the way of pricing power to its customers."

A combined Lucent/Alcatel would be the world’s top supplier of wireline telecom equipment and the world’s second biggest supplier of wireless gear, according to UBS Research, which declared the merger proposal “great on paper” in a research note issued this morning. As a merged entity, the two could harness each company’s relative strengths: Lucent is stronger in IP Multimedia Subsystem (IMS) architecture, CDMA and services, while Alcatel is stronger in access and optical markets. Lucent has stronger relationships with American carriers, while Alcatel is stronger in Europe and emerging markets.

The two companies could also realize significant cost savings by eliminating redundancies in their many common areas, such as UMTS, IMS, access and optical technologies and in their services businesses.

“I thought this segment of the industry would have started merging years ago,” industry analyst Jeff Kagan said.

One possible sticking point involves executive leadership. It’s long been rumored that the 2001 merger attempt failed due to an impasse over board seats and choosing the chief executive officer of the combined company.

In this case, Lucent’s CEO, Pat Russo has more experience at the top, having served there since 2002. Alcatel’s CEO, Serge Tchuruk, is expected to retire this year, likely leaving chief operating officer Mike Quigley to take his place. Quigley has been CEO of Alcatel USA but not a global organization like Lucent. As a CEO, Quigley would be greener than Russo, but one could argue his leadership as COO has been more fruitful, having dominated the access market--along with AT&T’s broadband business--while Russo’s company continues to struggle with flat revenue expectations for the year.

In a note this morning, UBS Research analyst Nikos Theodosopoulos suggested that Lucent may require an equal number of seats on the merged company’s board as well as “top management representation.”