Defense Concerns Now On Table For Lucent-Alcatel Merger

Well, as of now, it appears that the Alcatel (News - Alert)-Lucent marriage is officially on.

French firm Alcatel SA has been in talks to merge with Lucent Technologies (News - Alert), Inc. to form a $34 billion company -- Alcatel $20 billion, Lucent $17.7 billion -- with annual sales of over $25 billion, a deal both companies characterize as a merger of equals, intended to be priced at market."

The company would be based in Paris and its CEO would be Lucent's Patricia Russo, according to current information. Alcatel would own 60 percent of the new entity, as yet unnamed.

Concerns about projects sensitive to national defense in both France and America currently being carried out by both Alcatel and Lucent's Bell Labs must also be addressed before Paris and Washington sign off on the deal.

About five years ago Alcatel tried to buy Lucent, which was all for the deal in principle, but couldn’t nail down the management control issues, so it fell apart.

The deal creates a combined entity which would roughly match Cisco, the market leader among equipment manufacturers, and Alcatel's taking on lots of Lucent debt and $2.4 billion in unfunded pension and benefit obligations.

"Competition is increasing and size and scale really matter," Lucent Chief Executive Patricia Russo told analysts and reporters on a conference call, according to Reuters, adding that the prospect of joining the companies' research and development muscle helped to cinch the deal.

And as George Calhoun, a professor of business and technology at the Stevens Institute of Technology told USA Today, Alcatel's been trying for 20 years to penetrate the U.S. market.

And Lucent does between $4 and $5 billion in revenue from selling wireless gear, much more than Alcatel.

The one thing everybody seems to agree on is that there will be more consolidation, with Tellabs and Ciena, for example, looking to be picked up, and Nortel (News - Alert) looking to pick someone up, according to Steven Kamman.

Jobs will be a sticky issue -- Alcatel has over 50,000 of them, and Lucent has 30,000, down from 46,000 in 2002. As many as eight or nine thousand are sure to be lost.

It's not 100 percent in the bank yet -- industry analyst Jeff Kagan says " the issue of foreign ownership of a US telecom firm may raise concerns that will have to be addressed." As the deal would put a French concern in control of Bell Labs, which hold many sensitive U.S. defense patents and secrets, American regulators won't rubber-stamp this merger.

The company has proposed throwing an iron-clad fence, hopefully more secure than the Maginot Line, around any aspects of Bell Labs the American government doesn't want the French getting their hands on, by creating a separate entity run by individuals approved by the American government.

The issue of military assets is of concern in Paris as well, where public and private officials concede the deal is already 95 percent done, and that national security issues won't derail the merger.

Over the weekend it was reported that Alcatel was trying to finish a deal to conclude a series of talks with Thales, a French company and Europe's biggest defense electronics firm, to fold its satellite activities into Thales, according to Reuters, to protect secrecy.

David Sims is contributing editor for TMCnet. For more articles please visit David Sims' columnist page.

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