Telecommunications equipment makers Lucent Technologies and Alcatel on Tuesday called off merger talks after Lucent balked at the concept of a takeover, rather than a so-called "merger of equals."
Although the companies had essentially agreed to the financial terms of the $23 billion deal, the talks broke down due to disagreements over the structure of the combined company's board and management control, sources familiar with the situation say.
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"The deal is off for all the wrong reasons," says one source, who declined to be identified by name.
The companies put out a brief statement confirming that talks have been terminated but declined further comment.
In the negotiations, which grew out of Alcatel's interest in Lucent's fiber optic business, Lucent had initially agreed to hold a 42 percent ownership stake in the combined company, with Alcatel having majority control, sources say.
Lucent shareholders would have received a fixed exchange ratio of 0.2425 Alcatel shares for each Lucent share, sources say. That would not have provided any premium over the value of Lucent's current stock price.
Lucent Wanted Say In Board, Management Appointments
In lieu of a takeover premium, Lucent wanted a voice on the combined company's board and top management. The two sides also argued over what the merged company would be named, sources say. Lucent walked away when it became clear Alcatel viewed the deal as a takeover of its money-losing U.S. rival, rather than an equal partnership, according to sources.
"Lucent made it clear they were not interested in a takeover," a source says. "Lucent was not for sale; they wanted a strategic partnership."
"What are you going to shoot for if you're not giving your shareholders a premium?" a second source says. "You want equal representation."
The deal would have created an industry giant with ties to many of the largest and most lucrative telephone customers. The combined company would have had a broader product line and been able to better weather the market downturn, analysts say.
The scuttled talks leaves Lucent, which posted $4.7 billion in losses in the first half of its fiscal year, alone to plow through its restructuring efforts.
Murray Hill, N.J.-based Lucent carries a heavy debt load and has fallen behind rivals such as Nortel Networks and Cisco Systems due to management turnover and product-development missteps.
Lucent's market share slipped as it lost customers to its rivals and its products were viewed as outdated, analysts say.
As of March 31, Lucent had $2.3 billion of debt maturing within one year and $3.1 billion of longer-term debt, according to a filing with the Securities and Exchange Commission. Lucent earlier obtained $6.5 billion of bank credit lines.
Without Alcatel, Lucent Must Soldier On Alone
Analysts and investors have mixed views on Lucent selling itself for $23 billion. Some view Lucent as too weak to survive on its own and say Alcatel was its best hope to be bought whole, rather than selling businesses piecemeal.
Others scoffed at the idea of Lucent--with its more than 100-year-old history and renown Bell Labs research arm--being sold at fire-sale prices. Lucent's market capitalization has plunged to $23 billion, excluding its stake in Agere Systems, down from as more than $275 billion in December 1999.
"I would find it disturbing that Lucent thought it was a good idea to throw in the towel," says WR Hambrecht analyst Tim Savageaux.
Richard Steinberg, president of Steinberg Global Asset Management, a Florida asset management firm, says he expects Lucent's stock price to rebound now that merger talks have collapsed.
"When stocks like this trough, you have first put the tourniquet on before you put the band-aid on," says Steinberg, whose firm owns 126,500 Lucent shares. "Now it's time to rebuild, tighten the product line, see what areas still need to be cut and surgically remove areas that they don't think are strategic for the long-term core business. This is still a $28 billion market cap. This is not a company that can't get through these problems."
Officials from the three leading U.S. credit rating agencies, which have assigned Lucent ratings just one notch above junk status, on Tuesday said their focus will shift once again toward Lucent's cost-cutting efforts and the sale of its fiber business, which analysts said could raise $5 billion or more. Both Alcatel and Italian cables and tire group Pirelli have expressed interested in buying the unit.
'Clearly, a sale of the fiber business could provide the company with near-term financial flexibility, which could help support their current ratings,' said Robert Ray, senior vice president at one of the agencies, Moody's Investors Service.
Lucent's recent credit line requires it to raise $2.5 billion in cash from nonoperating sources by Sept. 30, making the sale of the fiber-cable unit almost a must, analysts said.
Alcatel May Still Pursue Other U.S. Deals
Alcatel, meanwhile, may pursue other acquisitions. The French company craves a stronger presence in the United States, and could look at smaller deal such as Internet infrastructure provider Redback Networks, analysts say.
"An acquisition of Redback could cost Alcatel more than $4 billion, but it would get them some very synergistic products and would not be such a major undertaking as [Lucent]," says WR Hambrecht's Savageaux.
Redback CEO Vivek Ragavan resigned on May 21, rekindling speculation it could be a takeover target. Redback has said it is not for sale but cannot predict the future.
Alcatel Cuts Outlook, Sets Plans To Divest Units
After the Lucent talks collapsed, Alcatel said it planned to divest its handsets and enterprise business divisions and focus on its networking, optics and space business. It said it would concentrate on service-provider network activities, which make up 80 percent of its telecoms business.
"This focus will lead to expedite reengineering, strategic alliances and divestitures of other current activities or assets," Alcatel said in a statement.
The divestitures continue a restructuring launched in 1995 by Alcatel CEO Serge Tchuruk, who sold off disparate businesses such as vineyards and high-speed rail and refocused the company on communications equipment.
Alcatel also warned that 2001 operating profits from its telecom activities will fall below 2000 levels. It said it expects a second-quarter net loss of around 3 billion euros in its telecoms activities after booking a 3 billion euro charge during the period.
The profit warning had been expected after Alcatel's key customer, Canada's 360networks, delayed two major projects, which will hurt Alcatel's revenues from underwater projects.
Shares of Lucent closed at $8.32, down $1.08, or 11.5 percent, on the New York Stock Exchange. Over the past year, they have underperformed the Standard & Poor's 500 index by more than 80 percent. Shares of Alcatel's American Depositary Receipts closed at $27.41, down 70 cents, or about 2.5 percent, also on the NYSE.
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