Lucent and Alcatel: Now comes the hard part

IDG News Service - Now that Lucent Technologies Inc. and Alcatel SA reached a definitive merger agreement yesterday, the two companies have their work cut out for them over the next year or so to make the deal work, according to one analyst.

"On paper, there is a good strategic fit between these two companies," said Bertrand Bidaud, vice president of carrier operations and strategy at Gartner Inc. "The challenge, as always, is execution."

Lucent and Alcatel have agreed to a merger of equals after more than a week of talks. Once the deal goes through, Alcatel shareholders will hold about 60% of the new company, which has combined annual revenue of $25 billion based on the most recent financial results. Lucent shareholders will hold the remaining 40% of the combined company's shares.

Slow growth in demand for telecommunication equipment and increased competition from low-cost vendors, such as China's Huawei Technologies Co. Ltd. and ZTE Corp., have made life difficult for both Lucent and Alcatel in recent years.

"Both companies had to do something, and this deal is probably the best they can do," Bidaud said.

The merger gives Lucent and Alcatel increased scale, with a strong presence in every major market. The enlarged company now needs to formulate a strategy that uses that scale to its advantage, Bidaud said. That means developing closer partnerships with top operators and playing a more strategic role in helping them revamp and expand their networks, he said.

"They need to get out of competition on a deal-to-deal basis," Bidaud said, noting that this market, characterized by low margins, is where low-cost vendors often do best.

The combined company also needs to put more emphasis on research and development for each of its product lines. "They can invest more," he said.

Making the merger work will take time and effort. Given the size and different corporate cultures of Alcatel and Lucent, Bidaud expects the integration process to occupy the attention of senior managers for the next year.

"Two to three years down the road, we'll be able to determine if the merger is a success," he said.