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Tuesday, August 29, 2006

The French Case Against Lucent

Stocks: (T)(NOK)(ALA)(SI)(ERIC)

According to Reuters, the French institution advisory firm Proxinvest thinks that Alacatel is paying too much for Lucent. Proxinvest also said the deal would harm corporate governance, although that part of the case seems a bit thin.

Lucent’s stock has traded almost in tandem with Alcatel’s since the deal was announced. Based on the current market caps of the two companies, Lucent will get about 40% of the combined company’s shares. Lucent’s price to sales is 1.1 according to Yahoo!Finance. Alacatel’s .9 times, so on that basis, the deal is a bit expensive.

Last year, Alcatel’s revenue was $15.5 billion. Lucent’s was $9.4 billion. Again, on that basis, the deal may be a bit rich for Alcatel.

The issue left our of the Proxinvest analysis seems to be that without a merger, both companies are likely to fall behind competitors like Motorola and the new Siemens joint venture with Nokia, and Ericsson. And, Ericsson has bought telecom equipment maker Maconi to strengthen its hand. For the same reason, Motorola has build a partnership with Chinese telecom equipment maker Huwai.

Right now, the only company that appears to have been left out in the cold is Nortel, and its finances and future prospects are a mess.

Scale will matter as the large telecommunications equipment companies vie for business with the likes of AT&T and Deutsche Telecom. So, will efficiency. The Nokia deal with Siemens will reduce the JV by thousand of jobs. They will also run joint R&D.

Proximvest fails to mention that Alactel and Lucent need the merger to stay in the first tier of suppliers. Without it, either one could fall back into a position closer to Nortel’s and investors can’t put a price on that.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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