Scuttling of Alcatel Deal Puts Spotlight Back on Lucent's Turnaround

At Lucent (LU), the for-sale sign is back on the lawn.

After more than a week of merger discussions, Lucent and Alcatel (ALA) ended their talks and parted ways Tuesday. Shares of both companies rallied, reversing the slide of recent weeks as talk increasingly cast Lucent as a sinking ship and Alcatel as a reckless savior, however cheap the life buoy it was preparing to toss.

But some analysts were wondering how good the news could be for Lucent, which has long been under financial duress and scuttled the no-premium Alcatel deal just a day before it was expected to be announced. Analysts and investors are now bandying about potential deals ranging from a Lucent breakup to a renegotiated Alcatel merger. Yet some people think the end of the deal puts Lucent in a weaker position than it was already.

"I'm sure they're going to try to tell everyone that their turnaround is going swimmingly, but if that was the case, then they've got to answer why they entered these negotiations with Alcatel in the first place," says Lehman Brothers analyst Steve Levy, who has a hold on Lucent. Lehman has no underwriting ties to Lucent.

Lucent shares sank 11% to $8.32 Tuesday but rose 18 cents in after-hours trading on Island on news that the talks had ended. Alcatel dropped 2.5% to $27.41 during the market, but regained nearly 6% to $29 after hours.

I Walk the Line

People close to Lucent say the company drew the line over its shrinking share of the postmerger responsibilities. "It was control issues," says a Lucent official who asked not to be identified, adding that Lucent was asked to give up everything from board positions to management hierarchy to product lines.

Others see a different rationale for a deal that was undertaken in a mood approaching desperation, however.

"At some point Lucent realized, 'Hey, we're getting bought.' And after they sounded that out with some of their largest shareholders, it probably became clear it wasn't going to be acceptable," says one analyst who spoke on the condition of anonymity.

With the Alcatel deal falling apart, plenty of observers believe Lucent is back in play. The catch is that it is playing to a very small audience of potential buyers willing to take on such a distressed, debt-laden property, observers say.

Others see Lucent casting off more of its parts to various buyers throughout the telecom industry. But at this point, because Lucent has already carved out many of its noncore businesses, further fractures might mean mutilation.

"Lucent's asset sales have been financially motivated, not strategic," says Lehman's Levy. "In order to finish the turnaround, I don't think breaking it up is necessary. There's a limited number of pieces to break it into."

And don't assume the book on this deal is necessarily closed, as Giga Information Group analyst Lisa Pierce suggests: "Cooler heads may prevail and we could see Alcatel and Lucent return to the table."

As Lucent has proven time and again, anything's possible.

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