Their friends warned them it would never work. But on Tuesday morning, Alcatel (ALA) and Lucent ignored the naysayers and tried to pull off one of the biggest, most-complicated, most-ballyhooed merger in telecom history. It couldn't be done, investors said.
They were right. By Tuesday afternoon, both firms announced the marriage was off. They were back to being just two more stumbling telecom giants, unlucky in love.
The morning after wasn't pretty. Alcatel erased any lingering glow its rumored takeover of Lucent may have generated by announcing it would miss its numbers for the quarter. Lucent, for its part, was the focus of more bad news as yet another customer was on the brink of defaulting on major payments. It's clear now that Lucent and Alcatel's would've been one of the more dysfunctional marriages in business history; both companies have a huge number of issues to deal with.
Had a deal happened, the two firms would have formed a trans-Atlantic telecommunications equipment powerhouse, a megacompany that could claim to have its equipment lodged in almost every phone and data network on Earth. But the deal, estimated to be worth between $23 billion and $32 billion, would have offered no premium for Lucent shareholders. It would have been a timid end for the once-towering company. And it would have saddled the former French conglomerate Alcatel with billions in debt and redundant product lines.
During the merger talks, the companies reportedly wanted investors to know the deal would save the combined juggernaut roughly $4 billion in its first year. But in the days following the announcement, Lucent and Alcatel made it clear they were also on track to lose billions thanks to bad deals signed at the height of the Internet boom.
Lucent's mistakes have been haunting it for a year now. Last week, Australian telecom carrier One.Tel (ONE) failed to raise sufficient funds to stay in business, which may put Lucent on the hook for hundreds of millions of dollars it had underwritten. This comes just weeks after U.S. telecom carrier Winstar, another customer to whom Lucent lent hundreds of millions of dollars, went bankrupt.
But that's only the start of Lucent's troubles. The company has staggering debt - $5 billion at the end of last year. And its loans and credit lines, now stretched thin, were secured under terms that make it difficult to pursue spinoffs, mergers or other quick fixes.
European telecom companies have been relatively insulated from the troubles that creamed many of their U.S. counterparts, but Alcatel is finally feeling the pinch. Last week it announced it would lose almost $3 billion in its second quarter, reportedly due to underperforming startup acquisitions Xylan and Packet Engines and the partial implosion of bonds it holds in customer 360Networks.
The biggest problem for the two companies is that the pool of customers capable of buying their equipment has dried up. According to Credit Suisse First Boston (dossier), investors poured $715 billion into telecommunications last year through debt and equity investments. That's about $60 billion a month. Only $80 billion is projected to be invested for all of 2001. Telecommunications carriers everywhere, even the old stalwarts, have slashed their spending for the foreseeable future.
No one knows when a rebound might occur, meaning Lucent and Alcatel have nowhere to look but inward.
Lucent is currently cutting 10,000 workers and reorganizing its business, while Alcatel announced it would cut more than 1,000 U.S. workers this year.
The irony for Alcatel is that the failure of the Lucent merger makes it even more difficult for the company to meet its goal of breaking into the U.S. market - and a reinvigorated Lucent would only make it tougher.
"I don't think [a merger] would've changed things a whole lot anyway," says Herb Martin, president and CEO of Salira, a networking startup. "It would have made Alcatel stronger in the U.S., but Lucent - well, Lucent will make a great graduate-school case study some
