Lucent-Alcate Merger: A Signature Move

It was one of the most ballyhooed marriages of the giants that took almost
five years to realize.  The $25 bn
merger of French telecom giant Alcatel and its US rival Lucent has the
opportunity to create one of the most successful telecom equipment firms and can
change the equations of the telecom equipment market. But all mergers face
challenges and issues that must be overcome to achieve synergy of combined
partner strengths. It's a win-win deal for both the companies, but the success
of the merger would depend more on how the integration between the two takes
place.

Most of its competitors-Ericsson, Siemens, Nokia, Motorola, and even
Cisco-were also best suited for Lucent acquisition. But since all of them have
capabilities to address the modern day telecom equipment market, none showed
interest in the deal. By grabbing the deal, Alcatel has not only secured a
position in the league of its competitors, but has also gained an edge over
them. Alcatel would now be in a position to provide end-to-end telecom solutions
to its customers.

India is a key market for both Lucent and Alcatel. Lucent is a market leader
in the CDMA segment. Alcatel has gained ground in the GSM arena after tying-up
with ITI. The joint entity supported by Bell Labs R&D facility in Bangalore
will have a wider product portfolio to offer. Similarly, in other geographies,
the Lucent acquisition would give Alcatel significant presence in North America.
Since Alcatel is based in Europe, it has been eyeing the US market for a long
time. The acquisition of Lucent has given Alcatel the opportunity to hit the
ground running there and burst into the marketplace. In next-generation
networks, the combination of Lucent's early IMS wins, particularly in North
America, and Alcatel's extensive experience in network migration throughout
Europe will give the new entity a clear leadership position. 

The Operations Boat

Though it's not a merger of equals, but both the companies have their own
respective strengths in the equipment market. Lucent's main selling point is
its wireless networking equipment business, while Alcatel's strength lies in
wireline business. In India, it's the customer who dictates the vendor
policies. Both Alcatel and Lucent are big in GSM and CDMA, respectively. Alcatel
in India is much active in the areas of GSM infrastructure and transmission
equipment and doesn't have any presence in the CDMA market. On the other hand,
Lucent has a major presence in CDMA. The combined strength of Alcatel and Lucent
will help in providing improved product line and would also address the complete
infrastructure requirements of its customers.

Alcatel is much stronger today than it was five years ago when the
dysfunctional marriage between the two couldn't take place due to issues
related to management control. It would be interesting to see which way the new
company goes in the enterprise segment. Lucent had spun-off its enterprise
network business and sold it to Avaya six years back to focus on selling
equipment and services. On the contrary, Alcatel has focussed on enterprise and
service providers. But now it intends to cut enterprise products and services,
focus on carrier services, and outsource a large part of its manufacturing. In
India, Alcatel doesn't have big presence in enterprise market and is also
facing stiff competition from Cisco. The manufacturer's weakest link is its
mobile technologies.  In mobile
infrastructure, Alcatel is not perceived as a market leader. Therefore, this
merger definitely complements each other.

Patrica Russo, president, Lucent Technologies

Customer Portfolio

Lucent has always been the largest equipment supplier for Reliance
Communications and more than 90% of its business comes from Reliance. The other
service providers, who do business with Lucent include TTSL, BSNL, and MTNL.
Lucent equipment have been installed by MTNL on its GSM lines. Though Lucent is
completely out of GSM business now, it still does maintenance work and back-end
support for all its GSM installations in India. But it was Reliance till now,
which was the saving grace for Lucent in India. The big investment of Lucent in
India so far is the Bell Labs set up in Bangalore.

Similarly, Alcatel also didn't have any major presence in India until it
tied-up with ITI, which was on the verge of closure due to declining demand. The
tie-up not only revamped ITI, but also helped Alcatel increase its footprints in
the country. Last year, it had announced the investment of 500 euros for setting
up manufacturing and R&D facilities in India in conjunction with ITI.

The New Game Plan

The merger will eventually be a boon for Alcatel in India. The country is on
the threshold of launching next generation 3G network and advanced services such
as IPTV. Alcatel was feeling the heat due to increased competition in this area,
but the Lucent acquisition would help in addressing 3G infrastructure issues of
CDMA and GSM operators and put them in a secure position. It's imperative for
Alcatel to dominate the fastest growing telecom market in its early stage for
better future prospects.

Secondly, the European and American vendors are facing stiff competition from
Chinese telecom equipment vendors such as Huawei and ZTE in India. The Chinese
players have already made their presence felt in the market, therefore the
merger call has come at the right time for both Alcatel and Lucent. It will help
Alcatel to tackle the technology issues of 'Triple Play', IPTV, broadband,
and voice services, which are all set to take off.    

Lucent has strength in CDMA2000 and UMTS-key technologies in the still
emerging 3G universe. It will be useful to Alcatel. The big catch is undoubtedly
the Bell Labs, which would boost Alcatel's R&D capabilities. Lucent's
acquisition is very timely in Indian context. Besides CDMA, Lucent has
capabilities in IPTV and IMS technologies as well. Therefore, if all goes well,
the merger would give Alcatel complete dominance in the equipment market in
India. 

Lucent is still strong in CDMA infrastructure business and has IMS
capabilities as well. Therefore, for Alcatel the acquisition was a wise move.
The issues that could crop up later include rationalization of the staff and the
integration of product lines of Lucent and Alcatel. The good thing is that there
are no overlapping products, which happens to be the case in most of the
M&As. Therefore, buying Lucent and then assimilating it might turn out to be
complicated for Alcatel.

The issue of layoffs in India may haunt both the employees and the
management, although there would be no heads rolling in India. According to
sources, both the companies have agreed to retain all its employees. The
combined entity has more than 3,200 professionals working in India.

It's still not clear as to which company's CEO would head the Indian
operations. Lucent India CEO, CS Rao was appointed a couple of years back and
has been successful in maintaining its relationship with its key customers. Ravi
Sharma, country manager, Alcatel has been instrumental in some big deals that
happened in India. The tie up with ITI has significant prominence in itself. The
major task for the new management in India would be to formalize a market
strategy.

Regulator's Nod

The impact of the merger in different geographies would only be seen if
regulators in the US don't raise red flags. The issue of government clearance
for the merger would be an uphill task for both the companies. Both Lucent and
Alcatel work for their respective government agencies. The combined entity has
announced to form a separate, independent US subsidiary, holding certain
contracts with the US government agencies. A board, to be composed of three
independent US citizens acceptable to the US government, would separately manage
this subsidiary. The new entity will have majority of French or European
directors and would be headquartered in Paris. Secondly, the Alcatel-Lucent
combine would layoff around 8,800 employees, most of them are likely to be in
the US, as the new management is considering consolidating operations in France.

The agreement between the two could face several levels of regulatory
scrutiny by agencies on both sides of the Atlantic. The first level of scrutiny
would be done by the anti-trust authorities. The European antitrust regulators
may be tougher to appease. Then there are security issues associated with the
acquisition of Lucent's Bell Labs by a foreign company. Bell Labs is part of
Lucent and does secret R&D for Department of Defense in the US and for the
National Security Agency of US. These include Lucent's sensitive government
contracts that involve working on an advanced communications system for the
Defense Advanced Research Projects Agency. It also works on laser communications
and secure wireless and network systems. These security concerns have brought
the deal under the scanner of the Committee on Foreign Investment in the United
States (CFIUS), which will do the initial scrutiny of the deal. Bell Labs buyout
has also been seen as foreign finance being used to acquire American technology.
This is again a major area of concern for CFIUS.

It would also take into consideration the fact that when American firms are
prohibited to buy French firms in similar domain, should this deal sail through?
Last year, the French Government decided to protect strategic domestic firms
from foreign buyouts. Telecom companies are on the protected list. The members
in American Congress are already concerned about the ongoing trend of foreign
grabs of American assets and would closely watch CFIUS' move in this regard.

Similarly, Alcatel has 9.5% holding in compatriot defense electronics group
Thales, and intends to raise its stake in it. The combined company will remain
the industrial partner of Thales and a key shareholder alongside the French
state. The directors on the Thales board who are nominated by the combined
company would be European Union citizens. Serge Tchuruk, or a French director or
a French corporate executive of the combined company would be the principal
liaison with Thales. Furthermore, the board of Alcatel has approved the
continuation of negotiations with Thales with a view to reinforce the
partnership through the contribution of certain assets and an increased
shareholding position in Thales. Therefore, this transaction has significant
hurdles.But it doesn't mean the deal won't go through; it just means it will
be looked at very carefully.

“In the end, the winners in this industry will be defined by who responds
most quickly, and with the most agility, to changing dynamics. This merger will
create the broadest wireless, wireline, and services portfolio in the industry,
and we will be in great position to address these dynamics.” said, Patricia
Russo, president, Lucent Technologies.

Rahul Gupta

rahulg@cybermedia.co.in