Critical reaction on Friday from investors about Alcatel's plan to acquire Lucent Technologies prompted the communications equipment companies to re-evaluate the terms of a possible merger, and the possibility of the deal altogether, executives close to the talks said.
Alcatel, Europe's second-largest telecommunication equipment maker, had been considering paying more than US$40 billion for Lucent, but is now unlikely to pay much more than the US$34 billion that Lucent is currently worth, the executives said.
Alcatel is backpedaling a bit after its stock was pummeled Friday by nearly 6 percent drop, or 2.10 euros, down to 33.90 euros (US$29.78) after a report about the talks in The New York Times. Shares of Lucent rose US$0.14, to US$9.95.
Lucent's board is expected to meet this week to consider whether to enter into formal negotiations with Alcatel, the executives said.
Spokesmen for Alcatel and Lucent declined to comment Friday.
A combination is seen as more palatable to Henry Schacht, Lucent's CEO, if it puts Lucent on equal footing with Alcatel, people close to the companies said on Friday.
After all, Lucent was the world's largest maker of communications equipment until recently. It was only in the last couple of years that Alcatel of France, retooled by chief executive Serge Tchuruk with an emphasis on selling a new generation of communications products, came to be viewed as a serious competitor of Lucent and Nortel Networks of Canada.
Schacht, Lucent's first chief executive when it was spun off from AT&T in 1996 who returned last October to head its restructuring effort, is known to value strengthening Lucent's businesses more than selling them. But it is not entirely clear with whom and how control would rest if Lucent were to merge with Alcatel.
Risks from a possible deal for Alcatel also became apparent Friday. In addition to the drop in its share price, the company's rating outlook was put on negative watch by Standard & Poor's. Earlier this week Moody's Investors Service put Alcatel on negative outlook. If rating agencies lower their ratings of Alcatel's debt that could translate into increased borrowing costs for the company.
Part of the apprehension over Alcatel's debt is related to the company's investment in 360networks Inc of Vancouver, Canada, the operator of a large fiber-optic network. Alcatel owns a large stake in 360networks and was expected to supply US$1.1 billion of equipment for the company's trans-Pacific cable, but 360networks, burdened by a lack of additional financing, delayed the project this week.
There is also concern over cash Alcatel would need to buy Lucent's optical business, for which it has submitted a bid, and over resources Alcatel would have to commit to reduce Lucent's debt if a merger occurs.
Concern also emerged Friday over the possibility that Bell Labs, Lucent's prestigious research arm with 30,000 scientists in 30 countries, could be absorbed into a foreign company. An aide for Sen. Robert Torricelli of New Jersey, the state where Lucent is based, said the senator had expressed his concern with Lucent officials.
"The potential acquisition of Lucent by Alcatel raises national security issues where Bell Labs is concerned," said a spokeswoman for the senator.
"These issues would need to be examined if Bell Labs comes under foreign control."
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