No love for Lucent shareholders
The struggling telecom equipment company is in talks with French rival Alcatel, but analysts say shareholders shouldn't count on a sweet deal.
NEW YORK (CNNMoney.com) - Are longtime shareholders of Lucent Technologies finally about to be rewarded for their faith in the downtrodden company? Lucent (Research), the widely held telecom equipment company that was spun off from AT&T in 1996, said Thursday it is involved in merger talks with French rival Alcatel (Research). Shares skyrocketed nearly 10 percent Friday morning on the news.
But for many shareholders, a takeover would be a bittersweet end to Lucent's days as an independent company. Lucent enjoyed a meteoric rise during the dot.com mania and then crashed spectacularly. Shares reached a high of about $84 -- on an intraday basis -- in December 1999. But by the end of 2000, they traded for just $11. And now, the stock trades barely above $3. Analysts say that, despite the surge in the stock Friday, investors shouldn't expect Alcatel to pay a significant premium for Lucent. To that end, Lucent and Alcatel even said in a joint statement Thursday night that the companies are "engaged in discussions about a potential merger of equals that is intended to be priced at market." Rival bid for Lucent isn't likely
So why did the stock pop so much Friday? Analysts say that investors may be thinking, and probably erroneously, that Lucent could become the target of a bidding war. "People are hoping that Lucent might be in play for other guys," said Tim Daubenspeck, an analyst with Pacific Crest Securities. Sweden's Ericsson (Research), Germany's Siemens (Research), Finnish telecom equipment firm Nokia (Research), and even Cisco and Motorola were all mentioned as companies that could possibly be suitors for Lucent. But analysts were quick to point out that few of these companies would actually need to buy Lucent, since Lucent's main selling point is in its wireless networking equipment business. And that's an area in which most of the other equipment firms already have a foothold. Alcatel, on the other hand, lacks a major wireless equipment business. "There's the question of who could buy Lucent and who would buy Lucent," said Simon Leopold, an analyst with Morgan Keegan. "Other potential bidders like Nokia, Ericsson and Motorola are strong in wireless already, so you have to scratch your head and ask why would they buy Lucent?" There's also the fact that Lucent-Alcatel talks are, to quote Yogi Berra, déjà vu all over again. Alcatel and Lucent were in merger discussions in 2001 but the two companies couldn't agree on a deal then because Alcatel wanted to retain control of the combined company. So analysts said there's no guarantee that a merger will actually take place this time around especially since Lucent is arguably a weaker company now than it was five years ago. "To come back and discuss things based on merger of equals doesn't make sense to me," said Daubenspeck. "If Alcatel could be in charge, fine. Otherwise, there's no reason to do this deal." $3 is better than zero
But analysts said that at this point, Lucent may realize that it is in the company's best interest to do a deal with Alcatel ...even if it's not for a big premium. Analysts have said for some time that telecom equipment carriers need to merge since many of their telecom customers have grown larger through acquisitions. And with AT&T (Research) agreeing to buy BellSouth earlier this month, analysts say that there is now an even greater sense of urgency for equipment vendors to pair up. "The consolidation in telecom had to trigger more talks about Lucent doing a deal," said Bill Lesieur, director with Technology Business Research, an independent research firm. In addition, some say Lucent doesn't have that much in the way of negotiating power given its somewhat tenuous financial situation. Although the company does have $4.4 billion in cash and securities, Lucent also has about $5 billion in long-term debt and nearly $6.2 billion in post-retirement benefit and pension liabilities. "Even paying $3 a share for Lucent is probably a good deal for shareholders," said Albert Lin, an analyst with American Technology Research. "Let's face it. Alcatel or anyone that wants to buy Lucent still has to deal with the fact that Lucent's balance sheet is weak." So Lucent investors shouldn't get their hopes up for a big payday. But there is still some reason for hope. Daubenspeck said Lucent shareholders might be better off by owning Alcatel stock, which they would receive if Alcatel bought Lucent. He argues that Alcatel would be probably be able to cut a significant amount of costs at Lucent, which should lead to stronger earnings for the combined company. And after years of underperformance, analysts say that a deal, even at no premium to Friday's price, would still be at least some small consolation for long-time Lucent shareholders. "It's far better than nothing. Be grateful for what you get. But certainly we're not going back to $70 a share," said Leopold. Will Motorola be a WNNR in 2006? Click here. For more about what the AT&T-BellSouth deal means for telco equipment companies, click here. Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking relationships with the companies. |
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