A merger of equals

Posted on March 29, 2006 , filed under Stocks | Print This Post

I’ve read a number of articles this week that have alluded to the same point that I drew in my post about the LU, Lucent Technologies, Inc. and ALA, Alcatel merger. With so much talk about a ‘merger of equals’ it’s no wonder that people are pointing out that the valuations of the companies show a different story.

I continue to believe that Lucent investors will not be happy using last Thursday’s, March 23rd, closing price of $2.82 as the base share price for a deal with Alcatel. I believe if Alcatel announces a deal without a premium attached to Lucent shares, LU investors will likely attempt to block the transaction.

Here is a quote from a Financial Times article that discusses the merger of equals,

The phrase ‘merger of equals’ is a misnomer because you always have a buyer and a seller,” says Jeffery Perry, of Ernst & Young’s transaction services unit in Chicago. “It can send the wrong message.”

Here is a quote from a WSJ article* about the merger

*note you must be a subscriber

When they acknowledged they were in deal talks last week, Lucent Technologies Inc. and France’s Alcatel SA described their potential combination as “a merger of equals.”

Yet that’s not the case in at least two important ways. The first, obvious way: The stock-market value of Lucent is less than $14 billion, versus over $21 billion for Alcatel.

While I have written that I think a combination of Lucent and Alcatel is a good idea, it will take some time for the operations to consolidate and realize the cost savings from the merged company. There is also a management risk that overlaps and confusion will create some deficiencies for the combined company. Without a premium attached to Lucent shares, I believe some LU investors may not want to take the risk of betting on the combined company. Those who are long on Lucent are likely anticipating a rebound for the company led by many of Lucent’s emerging technologies in 2006-2007. Alcatel may be getting a bargain considering the valuable IP of Lucent that does not immediately contribute to the bottom line of company. LU closed today at $3.04, unchanged from the prior days trading. Unless LU rises quickly without any news being released about the merger, I will likely hold my shares of the company until details of the merger are announced.

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