The Association of U S West Retirees



Adviser Slams Alcatel-Lucent Deal
Firm Says Holders Of French Company Should Reject Merger
By Leila Abboud
The Wall Street Journal
Wednesday, August 30, 2006

French investor-advisory firm Proxinvest is urging shareholders of French telecommunications-equipment maker Alcatel SA to reject a proposed merger with U.S. rival Lucent Technologies Inc., raising a potential roadblock as shareholders on both sides of the Atlantic prepare to vote on the deal next month.

In a letter sent to fund managers Monday, Proxinvest said Alcatel shareholders were paying too much for Lucent and advised them to vote against the deal.  The letter also slammed proposed changes to the corporate bylaws that would make it harder to unseat the chief executive and chairman.

Alcatel shareholders are scheduled to vote on the proposed merger at the French company's annual meeting Sept. 7 in Paris.  Lucent shareholders will also vote on the merger that same day.  For the merger to be approved, two-thirds of shareholders in each company must vote for it.

Proxinvest's position differs from that taken last week by the U.S.-based proxy-advisory firm, Institutional Shareholder Services.  In its merger analysis released last week, ISS recommended that shareholders of both firms support the deal, citing its "compelling strategic rationale, attractive synergies and conservation valuation".  Another U.S.-based advisory firm, Glass, Lewis & Co., also came out in favor of the deal last week.

Alcatel and Lucent announced their proposed merger in April.  The move was a reaction to intensifying competition in the telecom-equipment business, especially from new low-cost manufacturers emerging from China.  Consolidation among operators of telecommunications networks in recent years has also reduced the pool of buyers and put pressure on prices.

Lucent and Alcatel were considered natural merger partners because they have overlapping product lines and different strengths.  More than two-thirds of Alcatel's business is from Europe, Latin America, the Middle East and Africa.  The French company is particularly strong in equipment that enables regular telephone lines to carry high-speed Internet and digital-television traffic.  Nearly two-thirds of Lucent's business is done in the U.S. Alcatel had 2005 revenues of 13.1 billion ($16.75 billion) and a market capitalization of 13.04 billion.  Lucent had revenue of $9.44 billion last year and a market capitalization of $10.22 billion.

But since the merger was announced, Lucent issued a profit warning in July and weak quarterly results, prompting some Alcatel shareholders to question the value of the deal.  Lucent reported a 79% drop in profit and declining sales for its fiscal third quarter because of weak spending from U.S. telecommunications operators.

"The outlook for Lucent has significantly worsened since the deal was announced," said Richard Windsor, an analyst at Nomura Securities. "The strategic rationale for the deal is still there but I just think Alcatel is offering too much and should pay less."

Alcatel spokeswoman Regine Coqueran said the company's board had done an exhaustive and "prudent analysis of Lucent's business and believed that the price set in April was appropriate.  The value of a company depends more on long-term perspectives than on one or two quarters," said Ms. Coqueran.

Lucent spokeswoman Mary Lourdes Ambrus said, "We believe the terms of the merger are fair for both Lucent and Alcatel shareowners."

Proxinvest critiqued the financial terms of the proposed merger, under which Alcatel would pay Lucent shareholders 0.1952 Alcatel share for every Lucent share they own, valuing each Alcatel share at just over five Lucent shares.  Proxinvest said that given Lucent's falling share price and weak performance, the exchange rate should be closer to seven Lucent shares for each Alcatel share.  Lucent's shares gained three cents to $2.29 in late afternoon trade on the New York Stock Exchange.  Alcatel's shares, meanwhile, rose 22 cents to $12.34 on the exchange.

Proxinvest also criticized a proposal that would require votes from two-thirds of board members to remove either the chief executive officer or the chairman of the combined company.  The Alcatel spokeswoman said the rule would only last three years and was aimed at ensuring management stability after the merger.  The new rules also allow Alcatel's 68-year-old CEO, Serge Tchuruk, to remain the nonexecutive chairman of the new company without a specific age limit mandating his retirement.  The new rules would only require one-third of the board members be younger than 70 years old, which means Mr. Tchuruk would likely be able to remain on as long as he choses.

"This is a dramatic worsening of corporate governance and is not good for shareholders," said Pierre-Henri Leroy, president of Proxinvest.

Write to Leila Abboud at