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Alcatel, Lucent in talks
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May 18, 2001: 10:28 a.m. ET
French telecom gear maker reportedly offers $40B in stock, a 20% premium
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NEW YORK (CNNfn) - France's Alcatel is in advanced talks to buy Lucent Technologies of the U.S. for more than $40 billion in stock, according to a report Friday.
An all-stock deal valuing Lucent at a 20 percent premium over its current market price of $33.5 billion could be announced by early June, the New York Times said. The odds of the deal happening are 50-50, the paper said.
Alcatel, Europe's fourth-largest telecom equipment maker, wants to buy Lucent to break into the lucrative U.S. market, the world's biggest for telephone switches, fiber optics and Internet routers.
Spokesmen for both companies declined comment on the report Friday.
"I think for the shareholders overall it would be great if they could be moved into Alcatel," Michael Carty, stock market strategist at New Millennium Advisors, told CNNfn's Before Hours Friday. "At least they would come up with a premium price that Alcatel would pay. It would be good for the shareholders, but the question is, will it actually happen?"
Murray Hill, N.J.-based Lucent (LU: Research, Estimates), one of the most widely held U.S. stocks, and its rivals Nortel Networks (NT: Research, Estimates) and Cisco Systems (CSCO: Research, Estimates) dominate the industry.
Alcatel has been in talks to buy Lucent's fiber-optic cable business, which could be valued at up to $8 billion. If a full merger cannot be agreed on, Alcatel still is eager to acquire the unit, which Lucent hopes to sell to reduce debt.
Alcatel shares traded lower at  33.70, or $29.65, Friday. Lucent's shares were up to $10.45 in before-hours trading after ending at $9.81 Thursday.
Executives told the Times that the only stumbling block to the deal is whether Lucent's board is willing to sell the company, as the stock has plummeted from a high of $77.78.
Both companies are worried that Lucent's shareholders in the U.S. would dump the stock after the deal was completed, lowering the value of the combined company, because mutual funds that track U.S. stock indexes do not hold shares of foreign companies.
However, Gerard Klauer Mattison & Co. analyst Charles DiSanza believes the combination would be a strong one since there is little overlap between Alcatel and Lucent's businesses in the United States. The combined companies would make a formidable rival for Nortel Networks, he said.
"To me the combination is a very sensible one," DiSanza said. "It's a good mix. Alcatel has done very, very well in the United States and elsewhere, but there's not that much overlap (with Lucent), so I think it's a powerful global position, possibly forcing Nortel and Ericsson to get together."
Alcatel has racked up some big acquisitions in North America, including the $7.1 billion purchase of switch maker Newbridge Networks of Canada. The U.S. accounts for only 20 percent of Alcatel's sales.
Talks have been going on for a month and a decision about whether to proceed with formal negotiations is expected within the next week, the paper said.
In addition to gaining a U.S. foothold, Alcatel could gain access to Bell Labs, Lucent's research arm, which played a key role in creating such technological breakthroughs as the transistor and the laser.
Additionally, Alcatel would inherit some big headaches as Lucent struggles to deal with several ongoing problems.
Lucent has lagged competitors in the key optical equipment markets over the last few years and found itself saddled with manufacturing constraints and declining demand for its core telephone products.
Those problems led to the ouster last October of CEO Richard McGinn, who was replaced with former CEO Henry Schacht.
The company has lowered earnings guidance several times since then. On May 7, Lucent fired Chief Financial Officer Deborah Hopkins barely a year after wooing her away from Boeing Co. (BA: Research, Estimates). Some reports suggested Hopkins and Schacht had been at odds.
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Amidst this turmoil, two Lucent scientists and a third man were charged with stealing the company's valuable PathStar server system and selling it to China. Lucent, which suffered an $80 million loss from PathStar's theft, no longer uses the system, but its technology is key to valuable future Lucent products. 
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