It would be a feather in the cap of Alcatel’s
It would be a feather in the cap of Alcatel’sSerge Tchuruk if the acquisition-minded CEO were able to engineer the purchase of struggling Lucent Technologies. But a combination of the French and U.S. telecommunications equipment makers would have to overcome many obstacles to succeed, say management professors at Wharton and INSEAD.
Among other things, faculty members at the business schools on both sides of the Atlantic point to Alcatel’s inexperience in major acquisitions, antitrust concerns in the United States and Europe, and an American Congress that may be reluctant to see Lucent, with its famed Bell Labs, become part of a non-U.S. company. They say that if the current discussions go nowhere, other telecom equipment manufacturers may be interested in exploring bids for all or part of Lucent because Lucent’s stock price is depressed and will probably remain so for a long time to come.
The Wall Street Journal reported on May 23 that the boards of Lucent and Alcatel approved continued talks that could lead to a $34 billion merger. Alcatel has proposed a stock swap that would not pay Lucent shareholders a premium on its recent trading price, the newspaper said. A source told the Journal that the chances of a deal being consummated were only slightly better than 50-50.
“If I had to bet on the merger talks going through, I would bet against it,” says G. Anandalingam, professor of resource and technology management at Wharton. Maurizio Zollo, a strategy professor at INSEAD, in Fontainebleau, France, declines to predict whether the talks will bear fruit, but he calls Paris-based Alcatel’s attempt to acquire Lucent “a very risky move in spite of the strategic attractiveness.”
The question asked by Paul Verdin, chair in strategy and organization at the Free University of Brussels’ Solvay Business School and an affiliate professor at large at INSEAD, is, “Since Lucent has not been able to turn itself around, can Alcatel do it? That could turn out to be quite risky. Is Alcatel just going for size and market share here, or is it really after a significant source of value creation beyond size and the symbolic nature” of acquiring Lucent?
The faculty members say Alcatel’s interest in Lucent, based in Murray Hill, N.J., has existed for some time and came as no surprise to those who follow the telecoms industry. Alcatel, Europe’s No. 2 maker of telecommunications gear, has 130,000 employees, a presence in 130 countries, and a reputation as a well-managed enterprise. Despite its international scope, it is trying to become an even bigger player around the world. Since becoming CEO in 1995, Tchuruk has streamlined a company that once had interests in a sprawling number of businesses and embarked on a program to grow the company by acquisitions.
Alcatel, which traces some of its roots to the old International Telephone and Telegraph Co., is no stranger to the North American market. In the past three years, Alcatel has acquired DSC Communications of Dallas for $4.4 billion and Newbridge Networks of Canada for $7.1 billion. In 2000, about 22% of Alcatel’s $27 billion in revenues came from the United States, up sharply from U.S. sales of $1.5 billion just two years earlier. About two-thirds of Lucent’s $34 billion in sales comes from the United States.
Still, Alcatel is largely a Europe-centered company. “The history of Alcatel is the history of a typical European multinational, strongly rooted in a national culture and national markets” and which has been trying to shed any remnants of parochialism, Verdin says.
Alcatel’s interest in Lucent “is not completely out of the blue,” Verdin adds. “It could be the last big step in a strategy to be a truly global player. Being in the U.S. is definitely a part of that.”
By having their eyes focused on such a lucrative prize, however, Tchuruk and other Alcatel executives must be sure they do not allow their emotions to override their reason, Verdin warns. Compared to the DSC and Newbridge deals, “Lucent is an order of magnitude larger” for Alcatel to absorb. “It’s bigger than anything they’ve done before.”
Zollo agrees, but he adds that it is not only the size of Lucent, which has more than 100,000 employees worldwide and offices or distributors in some 65 countries, that would make it difficult for a merger to work. In some industries, he says, mergers of equals work fairly readily because those industries do not change quickly. For instance, the pharmaceuticals business has seen more than a few successful mergers. That business is highly competitive. But because it takes years for companies to develop new products, they can afford to devote the time and resources to concentrate on integrating two companies.
In the telecommunications equipment area and other technology industries, however, it is more difficult to succeed at integration because markets evolve extremely rapidly, says Zollo. “That does not allow you the time you need to figure out all the things you need to do and to implement them,” he says. “Alcatel has not shown that it has a particularly strong capability in managing integration processes. Neither has Lucent, for that matter. There is a very strong implementation risk even if a deal goes through.”
Although Lucent’s low stock price makes it an attractive target, Verdin says, Alcatel should keep in mind that there are good reasons why Wall Street has seen fit to pummel Lucent’s shares in recent months. “Lucent is having its own share of problems,” Verdin says. “It may look attractive because it is cheap, but the question is, ‘Is this a temporary slowdown in the telecom cycle?’ I don’t think so. I think [the industry] is going to be sitting on structural problems for a much longer time in terms of financing, overcapacity and stretched expectations. The timing is quite risky.”
Certainly, investors have taken a less than consistent view of news of Alcatel’s overture to Lucent. On May 18, the day that news of the discussions appeared in The New York Times, Alcatel’s stock fell 7%. On May 22, however, investor interest picked up, without Alcatel’s shares gaining 4.5% in heavy trading on the Paris Stock Exchange. Yet, after the Journal reported that the boards had given approval for additional talks, Alcatel’s stock began to drop on the Paris bourse. In addition, during the week of May 14 Standard & Poor’s placed Alcatel’s debt on review for possible downgrading and Moody’s Investors Service changed its ratings outlook on Alcatel to negative.
Another obstacle to a Lucent-Alcatel combination is their similar weaknesses, says Zollo. “They’re both the result of former monopolies. They’ve been growing over the decades as suppliers of state monopolies; Lucent did for AT&T what Alcatel did for France Telecom. They’ve lived very sheltered lives and have really struggled to develop new cultures in a competitive environment. They’re both strong from an R&D perspective. But it’s not clear that they have sufficient flexibility other than sheer size and accumulation of technological competence. It’s not clear that they have been able to really stay on top of hyper-fast developments.”
Zollo says a combined company would have certain advantages, such as making use of each other’s distribution channels. Lucent, which has been battling to make headway into European markets, would benefit, as would Alcatel, which wants to boost its share of the U.S. market. “There are enormous economies of scale, since they are competing in very similar areas,” Zollo says. “You can save a lot of money just by rationalizing research projects. But does that make the company more likely to be a winner against a Cisco Systems or Nortel or any hotshot company in Silicon Valley? In Europe, the combination of Alcatel and Lucent would have the upper hand against Siemens and other players. But the issue is one of speed.”
The faculty members agreed that a proposed Lucent-Alcatel combination would draw the scrutiny of antitrust officials in Washington and at the European Union in Brussels, and the companies would have to divest themselves of holdings in certain markets. Furthermore, Congress would probably object to having the United States lose a “crown jewel” like Bell Labs to foreign ownership for national security reasons, says Anandalingam. “If I were a Congressman, I would be upset if Bell Labs, which invented the chip and the transistor, went to a foreign company,” he says.
Anandalingam also says that the cultures of the two companies may not mesh well. “The French and the Americans don’t exactly work the same way,” he says. “Even though Alcatel is [not a state-owned] company, the way Europeans do business has the flavor of state monopolies.”
If a Lucent-Alcatel deal fails to materialize, Anandalingam says any number of companies might be interested in acquiring Lucent. Cisco Systems, already a major force in the Internet market with its routers, “has really been trying to get into the voice market, so I could see them being interested.” He also says Nortel may be interested in buying parts of Lucent, if Lucent were willing to sell. “Of course, both Nortel and Cisco have been hemorrhaging money,” Anandalingam says. “Their stock valuations are still high, so if they do a stock swap they might do a deal with Lucent, but if a deal had to involve cash, it probably wouldn’t happen.”
All the faculty members say that talk of a possible Alcatel-Lucent deal is reminiscent of the controversial merger of Germany’s Daimler Benz and Chrysler several years ago. At the time, the two companies billed the combination as a merger of equals. But it later emerged that Daimler’s senior management had always viewed the deal as a straight acquisition and set about getting rid of Chrysler executives. It also emerged that Chrysler was not as vibrant a company as Daimler believed. The transaction left a bad taste in the mouths of managers and employees in both Stuttgart and Auburn Hills, Mich.
Verdin says the Daimler-Chrysler combination comes to mind for two reasons. First, it entailed the hard work of meshing two very different cultures, which did not go well at all. More important, though, that merger involved a company, Daimler Benz, that felt it was internationalizing too slowly and sought to strengthen its geographical scope in one fell swoop by acquiring an American car maker rather than taking the time to strengthen its international market share using the tools it already had.
“Deep down, one could ask this question: Even if it isn’t a game of scale, and critical mass and geographical coverage, doesn’t Alcatel already have enough of those to get their benefits without needing another acquisition at this time? It’s not simply by making the deal that you realize synergies. The deal can become a huge management problem. Memories of the Daimler-Chrysler deal are still vivid and far from over.”