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Wednesday, August 30, 2006

A Funny Thing Happened On The Way To The Merger: Lucent And Alcatel

Stocks: (ALA)(LU)(VZ)(BT)(DT)(NOK)(SI)

After being panned by Proxinvest, a French institutional investor advisory firm, and pilloried by analysts in both the US and France, it appears the markets have begun to warm to the Alcatel merger with Lucent. Lucent's stock has moved from $2.20 to $2.32 in the last three days. The stock traded close to $2 in early July. Alacatel's shares were up sharply in trading on the French exchange today. Their recent movement has mirrored Lucent's.

Two factors seem to be at work as both stocks rise just ahead of the merger. The first is that the investment world appreaciates that size and scale will matter a great deal in the telecom equipment business. Chinese companies like Huawei, currently only provided equipment to telecom companies within that country, will enter the world markets within a few years. Their products will probably be priced below most that are currently available. Huawei has already done deals with BT Group and Deutsche Telekom. The new Lucent/Alacatel will also compete with the Seimens-Nokia joint venture, Ericsson and Motorola. Size will matter.

The other reason the market may be having a positive reaction to the merger is that the customer base for telecom equipment is doing well. Companies like Verizon, AT&T, BT and Deutsche Telekom are revamping and upgrading vast portions of their networks to deliver everything from next-generation wireless to IPTV. The cash flow from their old fixed-line businesses may be dropping, but in most cases it still provides a huge pool for system-wide retooling of the largest telecom operators.

It would appear that the market believes that Alcatel and Lucent are better off together than separate.

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

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