Lucent and Alcatel walk away from marriage plans

The expected takeover of Lucent Technologies Inc. by Alcatel could have proven the beginning of a rocky marriage, according to Canadian analysts.

Media reports out of the U.S. this week indicated an announcement from the two telecom equipment makers would come by Wednesday before the American stock markets open for business. But by late Tuesday afternoon, Lucent management reportedly walked away from the negotiating table, scuttling the plan. The deal would have been among the largest in high-tech history, valued at a rumoured US$40 billion.

Like Nortel, SR Telecom and others in the communications space, Lucent was hit hard by the demise of many competitive local exchange carriers (CLECs) over the last year. In January, after losing US$3.7 billion in one quarter, the company announced a major restructuring that saw about 16,000 positions axed worldwide, including about 10 per cent of Lucent Canada’s 350 employees.

While a takeover by Alcatel could have helped Lucent pare down its massive debt, the anticipated scrutiny from U.S. antitrust authorities would have meant any major benefits from the marriage would not have come in the short term, according to Ian Angus, principal at the Angus Telemanagement Group.

“Merging companies that big is really hard.”

“Alcatel is a bit of an artifact itself — about seven major firms have combined over the last hundred years to become the company we now know as Alcatel,” said Iain Grant, an analyst with the Yankee Group of Canada in Brockville, Ont. “Lucent has no such track record.”

Though Alcatel has some experience in the North American market after acquiring Canada’s Newbridge Networks last year, both Grant and Angus point out that Newbridge management was left, for the most part, to its own devices. Lucent’s recent financial history implies there would have been a much greater shakeup. And unlike Newbridge, Lucent is more of a head-to-head rival. In this case, the size of the combined entity may have become difficult to manage.

“It would not have the scale that a US$60 billion company should have,” Grant said. “It doesn’t really have the unity, command control or product sets.”

One of Lucent Canada’s customers disagreed. Robert Wolfe, president and COO of Toronto-based CLEC Group Telecom, said Tuesday he was looking forward to a potential combination of the two companies.

“It’s a positive,” he said. “You end up with a broader product set. It’ll be interesting to see in the areas of overlap which products they’ll decide to keep.”

A few weeks ago, Lucent Canada president Carol Stephenson met with Plesman Commuication’s editors to discuss the company’s attempts to turn its fortunes around. Stephenson said Lucent Canada was turning more of its attention to the top five incumbents with a focus on optical and wireless networking. “We had some 70 per cent of the entire CLEC market,” she said. “The problem is, most of those companies have disappeared.”

Though Angus said Lucent’s optical networking product line is fully capable of competing with the best that Nortel has to offer, it may have come too late to the party. “They’re coming in after the boom,” he said. “It could be years before another wave of investment.”

Even though the deal didn’t happen,Wolfe said companies like Lucent and Alcatel need to reexamine their core competencies.

“There’s the very large provider with an integrated product offering and then there are small one-off providers with a particular router or switch,” he said. “I think that it’s very difficult to maintain a position as being really good at a lot of things. It’s probably not unlikely that you’ll see fewer people trying to do that.”

A profile of Lucent’s history in the Canadian market appears in the June issue of Communications & Networking.

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