Alcatel-Lucent deal faces obstacles

Any Alcatel-Lucent deal could face government scrutiny

By BBC News Online's North America Business Reporter, David Schepp

Alcatel's potential bid to acquire rival Lucent faces more than a few obstacles, including Washington's skittishness in handing over a company that performs highly sensitive work for the US government.

Although the deal is still in the talking stages, it has raised antitrust concerns because the combined company would control more than 50% of the US digital subscriber line (DSL) business.

Lucent and Alcatel also have sizable dealings in switching equipment - electronic gizmos that allow computers to talk to one another over phone lines - which could also give the US government reason to pause.

Add in Lucent's financial woes, and the French telecommunications company's share price could face major downward pressure in the coming weeks.

Difficult integration

"The market does not like this deal, if it does happen, and is putting masses of pressure on Alcatel shares," said Simon Kirton of Aberdeen Asset Management. "The market thinks it will be difficult to integrate the two companies.

Transatlantic mergers have taken a beating in recent years. Daimler AG's 1998 purchase of Chrysler Corp has proven disastrous for Stuttgart, Germany-based Daimler.

The market does not like this deal, if it does happen, and is putting masses of pressure on Alcatel shares

Simon Kirton
Aberdeen Asset Management

Shares of the No. 3 auto maker have slid over 50% from levels shortly after the merger was completed.

"It would be a major distraction to Alcatel management to make this integration work because it would require more lay-offs, a lot of products would need to be cancelled", said UBS Warburg analyst Nikos Theodosopoulos.

And Alcatel does not have to look far to find another example of a bungled merger.

Netherlands-based Philips Electronics attempted to join forces with Lucent a few years ago to produce cell phones - only to unwind the deal after billion dollar losses.

The companies never produced a single successful product and Philips' mobile-phone business now hangs in the balance.

Philips says it intends to announce the fate of the division by 30 June. Chief financial officer Jan Hommen said on Monday that the company does not want to continue in the business as it is and hopes to rectify its current situation.

Government secrets

Aside from possible failed business dealings and falling share prices, the Alcatel-Lucent deal also faces the scrutiny of the US government.

Its anti-trust division, which enforces laws to protect trade and commerce from unlawful restraints and monopolies or unfair business practices, will no doubt examine the deal.

The US government may also be seeking to guard US government technologies that have been developed by Bell Laboratories, which the now-named Lucent acquired in the 1984 break-up of AT&T.

Bell Labs, the research division of Lucent, is noted for its encryption work done on behalf of the US National Security Agency, which uses the coded programmes to protect information systems.

Founded in 1925, Bell Labs has won six Nobel prizes and in 1947 developed the transistor, which paved the way for today's computers.

North American access

Notwithstanding the possible acquisition of the esteemed Bell Labs, Alcatel's purchase of Lucent would give it a presence in North America second only to Canada's Nortel Networks.

"Alcatel has always wanted a tremendous presence in the United States," said one fund manager, who declined to be named. "And that's why they've done the series of acquisitions that they've done over the years.

"But none of them have given them the No. 1, 2 or 3 total systems company clout in the US. With this - boom - they'd be there."

In recent years, Alcatel has shed operations ranging from vineyards to nuclear power, divesting more than $10bn in an effort to push into the US market. The move allowed Alcatel fund a purchase of optical-equipment company DSC Communications in 1998.

Alcatel's purchase of Lucent would further boost its presence in optical networking. And along with Lucent's businesses comes its clients.

"Alcatel is interested in Lucent's customers," an industry source said. "It has longstanding relationships with incumbent operators worldwide. That sums up why they're in talks."