Amid weeks of speculation that Alcatel SA and Lucent Technologies Inc. would merge, the two telecommunications companies on Sunday inked a deal for US$13.4 billion, creating a transatlantic powerhouse with combined revenues of US$25 billion and 88,000 employees.
The all shares transaction, which is expected to close in six to 12 months, gives Paris-based Alcatel — a strong player in Europe and Asia — a leg up on nabbing market share in the highly-contested North American telecom segment. Alcatel’s previous acquisitions include Canadian software company iMagic in 2003 and Kanata, Ont.-based Newbridge Network Corp for US$7.1 billion in 2000. The two had tried to merge in 2001 but the deal fell through at the last minute.
The firms expect to save US$1.7 billion by reducing the combined workforce by 10 per cent (or 9,000 employees) 24 months following the closing of the deal. They did not specify which geographic regions would be affected by the cuts. Both Alcatel and Lucent have sales offices in the Greater Toronto Area.
“This is creating the first true global communications provider,” said Serge Tchuruk, chairman and CEO of Alcatel. “Not so many players today can offer end-to-end solutions.”
But Ian Angus of consulting firm Angus Telemanagement said the staff cuts could affect Alcatel’s operations in Ottawa.
“(Newbridge) has been a pretty much standalone operation,” said Angus. “The real question is we don’t know how effective it’s been.”
Tchuruk made the comments in a teleconference call Sunday to press and analysts. He was joined by Patricia Russo, chairman and CEO of Lucent who will become CEO of the new company. Alcatel and Lucent held a second teleconference on Monday morning.
“We share a common vision of where networks are going and what’s required to get them there,” said Russo. “We share a combined culture of technical excellence and a passion for innovation.”
The board of directors for the new company will total 14 members with 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.
The Alcatel-Lucent merger is one of a series of deals that have taken place in the telecommunications segment recently. In the last year, SBC Communications bought AT&T, Verizon acquired MCI and, last month, AT&T Inc. proposed a US$67-billion deal of BellSouth Corp. This week’s announcement has caused some analysts to speculate what some other potential merger targets might be ahead in the telecom market.
Brian Sharwood, a principal of SeaBoard Group in Toronto, said the deal is good in the short term because it takes a player out of the market.
“People like Ericsson have been fishing around but they’re also in the midst of trying to incorporate Marconi, which was a bit of a mess before,” said Sharwood, adding there are rumours that Siemens might spin off its telco arm. Nortel Networks is also a potential target, he said. But don’t expect Cisco to come knocking on Nortel’s headquarters anytime soon.
“I don’t think Cisco’s interested in anything in that size range,” said Sharwood. “It doesn’t fit into their strategy. Right now they’re focused on home electronics.”
One of the key drivers behind these mergers is shrinking profit margins in the telecom sector, said Angus.
“This is a market where margins are getting squeezed all the time,” he said. “As our ability to move enormous amounts of bits for small money increases, the profit margins are being squeezed. If your customer’s profit margins are being squeezed so are yours.”
The deal also gives Alcatel access to Lucent’s Bell Labs, which were created by AT&T in 1925 and spun off to Lucent in 1996.
“Customers want us to be both global and local,” said Russo. “We have a comprehensive portfolio that leverages 26,000 engineers and 25,000 active patents.”
The labs are famous for military and commercial research including the transistor, the laser, the UNIX operating system, the C++ programming language, and, most recently, the world’s first semiconductor laser.
Because of the sensitive nature of Bell Labs’ research, Lucent on Monday announced a three-person panel to head the subsidiary that will house Bell Labs. Alcatel is currently attempting to work out a similar solution for its satellite business.
Combined, Alcatel and Lucent have an R&D investment capacity of US $2.9 billion — which makes Alcatel partners like Mississauga, Ont.-based MDM Systems excited about the deal’s prospects for their business.
“It puts R&D in North America not just in Europe,” said Fred Bendell, senior account manager, MDM. “France is the backyard for Alcatel. With Lucent’s big R&D in the States, it brings the technology to North America.”
Last summer Alcatel introduced a new program for North American resellers to attract more business here and south of the border called the North America Business Partner Program. Other Canadian Alcatel partners include SSP Telecom of Trois-Rivieres, Que. and ESI Technologies of Saint-Laurent, Que.