Alcatel & Lucent
A French-American Merger
Michael Burke, Kevin Colas-Moerman, Kevin Frycki, Betsy Rath
Founded in 1989 when Bell Labs was combined with several AT&T
divisions, and renamed Lucent
Global leader in telecom equipment
Manufactures products used to build communications network
Also makes communications and network management software
and the servicing of those products.
Majority of Lucent's products are developed by its Bell Laboratories
research and development unit.
One of France's largest industrial companies
A leading global supplier of high-tech equipment for
Manufactures core network switching and transmission systems for
wireline and wireless networks (majority of its sales)
Other communications products include cell phones,
communications cable, and satellite equipment.
Alcatel to Acquire Lucent
Merger deal approved in September, 2006.
The new telecom entity will be called Alcatel-Lucent
The merger is a horizontal merger (being called a “merger of equals”)
Both company’s primary business includes the manufacture of
Primary driver of the merger: an effort to create a more efficient
economy of scale with the combined company.
Merger Rationale/ Combined synergies
The combined business can leverage one another’s array of
customer relationships, particularly in the geographic sense.
Share the existing leadership each possessed in existing
technologies and the R&D associated with evolving technologies.
Individual competitive advantages that can now be shared and
Lucent has a clear leadership position on the network services side (over $5B in
Alcatel possesses clear advantages in global presence.
Terms of Merger
The 'merger of equals' will be priced close to market
No premium will be paid to Lucent shareholders.
Lucent shareowners will receive 0.1952 of an ADS (American Depositary Share)
representing ordinary shares of Alcatel for each common share of Lucent.
At completion of the merger:
Alcatel shareholders will own approximately 60% percent of the combined
Lucent shareholders will own approximately 40% percent of the combined
Combined company will have a market cap of $36 billion, sales of around $25
billion, and a workforce of about 88,000 employees.
Combined company benefits from
Wider, more integrated menu of products
Cost savings, stronger financial position and operating synergies
Leveraging the portfolio of customers, technologies and geographic
Customers benefit from
“one-stop-shop” for IT and Telecom needs vs. various vendors
Alcatel shareholders will own 60% of the company versus Lucent
shareholders lesser 40% stake (takeover versus merger?)
Expected Synergies for the combined company
• ~ $1.7 bn in annual pre-tax
cost synergies within 3 years
• NPV of cost synergies ~ $12 bn REVENUE ENHANCEMENT
• Combined CY05 revenues of $25 bn
• Presence in all major carriers
• $3.5 bn in US tax savings
• $2.9 bn in credits
• 26,100 R&D staff and 25,000 patents
• Improved product and
• Long-dated maturities with over 60%
of debt maturing in or after 2010
• Substantial deferred tax assets
…. and Losers
Layoffs and moving of Headquarters to France
Potential French plot to takeover company with Alcatel’s 60%
Competing with large force of newly combined company
Potential Risks of the Deal
Cultural and political integration risks
Merging French and American companies and cultures
Headquarters in France
Stock transaction linked to fixed exchange rate
Dependant on regulatory, government and shareholder approval
Management’s focus on integrating companies and cultures may
distract from focus on increasing Asian competitors (China)
From a regulatory approval standpoint, an international merger like
this one must be approved by both US and European agencies
Approvals range from anti-trust issues to security fears.
In Europe, the main regulatory body is the European Union.
In the US, mergers must be approved by (of public companies) SEC,
Dept of Justice, US Fed Trace Commission and CFIUS.
Currently, the merger has not violated any anti-trust issues, and it is
on track to close by year end.
Valuation by JPMorgan
JP Morgan Analysis of the Merger Consideration
Range of Implied Exchange Ratio
Historical Common Stock Performance (12/30/2005 to 3/31/2006) 0.183x-0.215x
Publicly traded comparable company analysis
Firm value/EBITDA 0.180x-0.270x
Firm value/ Adjusted EBITDA 0.115x-0.175x
Price/Adjusted Earnings 0.110x-0.150x
Discounted cash flow analysis 0.145x-0.230x
Merger exchange ratio 0.1952x
Estimated Value of the Purchase Price
Purchase price computation
Number of Lucent common stock outstanding as of March 31, 2006 4,476,628,861
Treasury stock as of March 31, 2006 -
Exchange ratio per share (1,952 Alcatel ordinary shares exchanged for 10,000 Lucent ordinary
shares tendered) 0.1952
Total number of Alcatel ordinary shares to be issued 873,837,954
Multiplied by Alcatel's average stock price (in euros) for the period beginning two days before
and ending two days after the April 2, 2006 announcement of the merger, as an approximation
for the stock price at the effective date of the merger 13,045
Fair value of Alcatel ordinary shares issued (in millions of euros) 11,399
Fair value of outstanding warrants (in millions of euros) 105
Fair value of outstanding stock options and similar equity awards (in millions of euros) 215
Estimated transaction costs (in millions of euros) 50
Estimated purchase price (in millions of euros) 11,769
NOTE : Alcatel's estimated direct transaction costs amount to 450 million under both IFRS and U.S. GAAP (Lucent's costs
are expensed as incurred). These amounts are before tax. The estimated cost of issuing Alcatel ADSs has not been taken into
account (these costs are estimated to be 42 million, and are accounted for as a reduction of the proceeds from the issuance of
Alcatel and Lucent’s 2005 combined market share (in %)
Alcatel and Lucent’s geographic overlap
LU/ALA Risk Arbitrage Opportunity
A risk arbitrage position on 4/2 would look like:
100000 long LU @ $3.08 – ($308,000)
19520 short ALA @ $16.21 – 316,419.20
Prices Date Close (1 LU = .19520 ALA)
ALA 3/31 $15.40
LU 3/31 $3.05 ---------
4/2 $3.08 (2.7%)
10/10 $2.27 (1.4%)
* Institutions typically get involved at 300 bps over comp risk free rate (RF 4.9% today)
How has the deal turned out?
The deal is still on target to close by year end
Mergers of equals have been sold to investors as opportunities to
create efficiencies and gain scale. Daimler / Chrysler and Boston
Scientific / Guidant clearly show that the value is often difficult to
Recent trading in LU/ALA clearly show there could be trouble finding
value in this deal as well.
Alcatel 1 Year Chart
Lucent 1 Year Chart
Combined 1 Year Chart