UPDATE: Lucent, Alcatel Joined Better Able To Face Telcos "

NEW YORK -(Dow Jones)- Lucent Technologies's willingness to discuss a merger with Alcatel could be taken as an acknowledgement that it won't be able to survive in the changing telecom landscape by itself.

The Murray Hill, N.J., maker of telecommunications equipment has done a remarkable job of rebounding from the telecom crash that began six years ago, due to the strength of its wireless business. But Lucent's weaker presence in the traditional wireline business was often a point of criticism, as many believed the company lacked the technology and products to meet the growing trend of converged wireline and wireless networks.

"As a standalone company, they're missing a lot of the key growth trends," said Tim Daubenspeck, an analyst with Pacific Crest Securities.

Lucent primarily provides equipment to serve wireless networks under code division multiple access, or CDMA, technology - standards used by the likes of Sprint Nextel and Verizon Communications's Verizon Wireless. Lucent's exposure to the wireless business was made apparent following the release of its fiscal first-quarter results in January, when lackluster spending by wireless carriers led to disappointing earnings. Indeed, Chief Executive Pat Russo said in October that she expects wireless revenue to moderate this year.

Still, many look to Lucent as a capable supplier of wireless technology, and the company has much of its growth pegged to third-generation, or 3G, technology. Much of the spending on equipment, however, has been completed, and the next phase of spending won't occur until consumers more broadly adopt the technology, according to American Technology Research analyst Albert Lin.

In areas such as access to high-speed digital subscriber line, or DSL, Internet connections, or in Internet-based television, Lucent is much weaker. Lucent has made much noise about the growth vehicle that is Internet protocol multimedia subsystem, or IMS, which combines multiple networks under one architecture. Its lack of wireline and wireless technology, however, has some doubting its ability to pursue IMS alone.

"They're always trying to highlight that [IMS] vision," Lin said. "That sounds like a great long-term vision, but you only have half the parts to get there."

Alcatel's strong presence in the DSL access business and other wireline technology would fill in gaps in Lucent's product portfolio.

In the near term, Lucent's business has improved steadily, if at a frustrating pace. Over the past several quarters, Lucent's results have been propped up by an accounting rule that gives it a pension credit. That credit is expected to continue helping Lucent through 2006, although at a small pace. While the pension issue is a positive factor in the near term, it will ultimately become a huge liability down the line, Lin said.

"Lucent is technically bankrupt because of the potential liabilities from [other post-employment benefits] and pension," the analyst said. He doesn't have any conflicts of interest.

With the pension issue at the forefront, Lucent's stock continues to meander in the low-single digits. At the Lucent annual meeting in February, shareholders lashed out at Russo and her management team for the woeful state of their investment.

Lucent's weaker position in relation to Alcatel suggests any deal will be structured so that Alcatel will be the acquirer.

"The only way this works is if Alcatel is in charge," Daubenspeck said. "It doesn't make sense any other way."

The analyst doesn't have any conflicts of interest to report.

Analysts say Lucent doesn't deserve a price premium, which is why both companies made reference to market value when confirming they were in talks of a merger. Market value suggests a deal will be based on current stock prices, and that there will be no premium.

While the two companies' products and technology fit well, their corporate cultures may not. There are inherent complications with combining work forces based in the U.S. and France, although Alcatel does have several thousand employees in the U.S.

In addition, the reference of "merger of equals" adds uncertainty as to who would run the company. The Wall Street Journal reported Russo would serve as chief executive, but that may ruffle feathers on the Alcatel side. Daubenspeck said he believes Alcatel management will have a strong hand in the direction of the company, particularly in how Lucent slashes costs.

This isn't the first time the two tried to get hitched. The companies were near a deal in May 2001 where Alcatel would have paid $22.8 billion in stock for Lucent. The deal reportedly fell apart at the last minute because Lucent was seeking a merger of equals rather than accept a buyout. Based on its recent trading price, Lucent has a market value of nearly $14 billion.

Following the failed transaction, the companies continued to restructure, slashing tens of thousands of jobs and unloading marginal businesses, as they sought to adjust to weak spending on telecom equipment. Lucent, for instance, sold stakes in two Chinese joint ventures for $225 million, while Alcatel sold its DSL modem business for EUR439 million and a stake in engineering group Alstom SA for EUR390 million.

Lucent recently traded at $3.10, up 27 cents, or 9.6%, on volume of 143.3 million shares. Average daily volume is 50.8 million shares.

Alcatel recently traded at $15.87, up 42 cents, or 2.7%, on more than double the normal volume.

-By Roger Cheng, Dow Jones Newswires; 201-938-2020; roger.cheng@dowjones.com

(Chris Reiter contributed to this report.)

(END) Dow Jones Newswires"

Posted to the site on 24th March 2006