Lucent and Alcatel

Posted on March 24, 2006 , filed under Stocks | Print This Post

While I think the proposed LU, Lucent Technologies, Inc. and ALA, Alcatel merger is a good idea, I have some concerns as a Lucent investor with the pricing of LU shares. The latest news has Alcatel acquiring Lucent at market price. The estimated value of the combined company will be $34 billion. I doubt Lucent investors are very happy with this. At the close of today’s trading, Alcatel’s market cap is $20.52 billion and Lucent’s market cap is $13.68 billion. The combined market caps already exceed the $34 billion dollar estimated value of the combined companies. News outlets are already speculating about the current value of the companies.

Here is a quote from this Reuters press release:

Lucent’s market capitalization is about $12.6 billion, compared to Alcatel’s value of about $22 billion.

According to the press release, if LU shares were purchased using a $12.6 billion market cap, each LU share would be priced at $2.82. Normally the way I have seen acquisitions work is that the shares of the purchaser will go down because investors view the purchaser as taking an assumed risk, and shares of the company being acquired will rise. Today what we saw is ALA and LU rise. The market appears to be assuming that the consolidation is a good idea for both companies and will lower risk overall. I don’t see how Lucent investors would be happy with a share price of $2.82, which is far lower than the company’s 52 week high of $3.49.

Taken from the same press release:

Shareholders might not be happy about the proposed price, said Pranav Rawal, an equity analyst at Metropolitan West Capital Management LLC, a large Lucent shareholder.

As a Lucent investor I am definitely not going to be happy with a share price of $2.82. What I would consider fair is taking LU’s 52 week high of $3.49 and using that as a starting point. The yearly historical high of $3.49 reflects how the market priced LU using earnings, positive news and market conditions surrounding the company’s future prospects. A merger with Alcatel should obviously produce greater opportunity for Lucent than anything that has happened in the last year. At $3.49, LU would have a market cap of $15.6 billion. If the combined deal value remained at $34 billion that would place ALA’s market cap at $18.4 billion or $14.05 per share. This is not a far stretch considering shares of ALA have traded exactly at $14.05 as the low in the last 2 weeks. I believe for a merger of equals, as some news outlets are calling this merger, LU’s share price has to go up and ALA’s share price has to go down for the markets caps to be closer in value. The current $10 billion disparity, as the above press release prices the two companies, has ALA valued almost twice that of LU. That’s certainly not a merger of equals in practical price terms.

Add this post to your favorite social networking site

Comments

RSS feed | Trackback URI

2 Comments »

Comment by Alexander Peterc

2006-03-26 11:17:04

Mate, you can’t honestly expect any company to offer a 52-week high in a bid just because a given share reached that price in the past year, especially when inaccurate, over-optimistic forecasts were given. Such is the case of Lucent remember the warning a couple of months ago? That, market conditions, and poor FY05 results are all reasons why the stock is not at its 52-week high, and they are all objective reasons determining LU’s price (and what ALA will pay) today.

The merger details are not announced yet at this stage but in all likelihood you’ll be getting the equivalent of Alcatel shares for your Lucent shares, and it seems that the value equivalent will be based on Thursday closing prices of both companies. Prices thereafter are affected by speculation and arbitrage and therefore cannot be a base for a deal, otherwise Alcatel and/or Lucent shareholders expose themselves to theoretically unlimited dilution risk.

Also take notice of the following:

- This is a good deal for both parties; synergies & savings as well as very significant cross-selling opportunities will be reflected in a higher valuation of the combined entity. If the deal is good, all shareholders will benefit, at constant market conditions.

- The market is in my opinion currently speculating on a counter-bid on Lucent which is why the stock is up more than Alcatel’s (otherwise they would both react identically). That’s far-fetched, again in my opinion, because any potential suitor would do better to go for Nortel instead of engaging in a costly bidding war and end up over-paying for the asset.

- Lucent needs this merger more than Alcatel. Lucent lost out on the current round of gigantic network overhauls involving deep-fibre, next-gen broadband and IPTV at ATT (Lightspeed) soon enlarged to BellSouth, and at VZ (FiOS…). There will not be another chance for LU. This way, they get to work together on Lightspeed with Alcatel, and add to Alcatel’s current near-monopoly in AT&T’s access gear the huge LU installed base in optical transport, as well as a very good IMS solution which will ultimately link with Cingular (soon to become integral part of AT&T) which LU is supplying with WCDMA (3G) gear (alongside Ericsson). THIS is where the real game is, and LU can be IN the game by merging, or out and going nowhere by not merging.

See, the forces in play are irresistible, and LU doesn’t have the upper hand – they have market positions that are extremely attractive for Alcatel but their bargaining power is declining by the minute. It’s a good deal, don’t fuss about and get it done asap in my opinion, before the rest of the industry gets the consolidation act together.

One that should really watch its back is Cisco. Alreadly not going anywhere really with carriers (optics down the drain; weak in IPTV; SFA buyout will not really help because what do you do with routers and set-tops but nothing in between, no DSL, no proper multiservice edge, no FTTx and no integration skills), Cisco will now be really threatened in the most promising market currently, while their core router sales stagnate. Either ALA+LU acquire Juniper in a little while and sign the terminal demise of CSCO, or CSCO acquires ALA+LU… and that’s where you’ll get your REAL premium for this transaction (because they will have to pay a very significant premium to get ALA+LU in an unfriendly approach – and I can’t imagine how it could be friendly).
Cheers from the other side of the Atlantic!

Reply to this comment

Comment by Andy

2006-03-26 11:42:16

Thanks for the informative comment. I’m eagerly waiting the details of the merger. I agree that Alcatel has the upper hand in the merger discussions and that it benefits Lucent more than Alcatel. I do hope some sort of premium is attached to LU or that the price of LU is based on a later closing date than the March 23rd date you guessed. I believe that the entire telecom and wireless industry will see strong growth in 2006-2007, lead by increased spending in emerging markets. I believe many LU investors are long on the company betting that the telecom industry is only at the beginning of an eventual rebound.

Reply to this comment