Telecoms giants in merger talks, report says

No smiles at Lucent as it battles bad loans and accelerates lay-offs

Lucent Technologies and Alcatel, the US and French telecoms equipment giants, have been holding preliminary talks about a merger, the Wall Street Journal Europe newspaper reported.

Citing sources familiar with the situation, the newspaper said a deal was now "financially plausible" although the two sides hadn't yet discussed financial terms.

It admitted the chances of a deal materialising were "slim".

Both companies have a market value of about £25bn ($35bn).

Earlier this week, Alcatel said it had submitted a bid for Lucent's fibre-optic unit, which is expected to fetch at least $4bn.

Both companies have recently announced quarterly results that showed the extent of the (different) problems they are facing.

Lucent restructuring

Lucent reported a $3.7bn (£2.6bn) operating loss for its second quarter and said it would acclerate plans to shed 10,000 jobs.

The company is pursuing far-reaching restructuring plans in attempts to return to financial health.

Much of the damage to Lucent's performance was done by investments in and loans to Winstar, a broadband communications provider which has filed for bankruptcy protection.

Lucent - formerly known as AT&T International - was spun off from its parent in 1996 and was once the world's biggest telecoms equipment supplier.

But it has struggled to compete in the key optical networking market and faced falling demand for its core telephone equipment products.

Some analysts have been sceptical that the restructuring will have the desired effect. They have said the company might be able to improve its financial position with cost cuts but will struggle to compete, given its current product portfolio.

Lucent shares have dropped nearly 90% on the New York Stock Exchange in the past year.

Recently, Lucent has been forced to deny rumours that it is on the verge of bankruptcy.

Alcatel outsourcing

Alcatel has been battling a sharp slowdown in the European mobile phone market.

Earlier this week, it downgraded its expectations for 2001 sales to growth of 5-15% having earlier predicted 20-25% growth.

It said that because of slower growth it had decided to outsource mobile phone production to Singapore-based Flextronics - the same company to which Ericsson recently agreed to transfer its handset manufacturing.

It reported first-quarter net profit down 19% to 210m euros, saying the performance of the handset unit had cut 150m euros from profits.

The company said it planned to cut costs by $1bn a year and reduce working capital by the same amount.