Updated from 12:22 p.m. EDT

Trans-Atlantic rivals Alcatel ( ALA) and Lucent ( LU) say they have agreed to merge.

The $13.4 billion all-stock deal will create a global telecom equipment manufacturing giant and is expected to launch a wave of consolidation among the two companies' competitors.

Alcatel and Lucent announced the agreement in a joint press release Sunday, saying the merged company will achieve $1.7 billion in pretax savings within three years and annual revenue of $25 billion. Talks between the two had been a key focus for telecom investors in recent days after Lucent confirmed negotiations were underway.

The two companies are billing the deal as a "merger of equals," and each will have equal board representation. But Alcatel is the buyer, and assuming the deal goes through, its shareholders will control 60% of the outstanding stock, vs. about 40% for Lucent holders.

Under the terms of the agreement, Lucent shareowners will receive 0.1952 of an Alcatel American depository share for each Lucent share they hold. Based on Alcatel's Friday closing price of $15.40, that fraction has a cash value of $3.01, less than Lucent's Friday closing level of $3.05. Before Lucent confirmed the companies were in talks, its shares were fetching about $2.82.

The combined company's ordinary shares will continue to be traded on the Euronext Paris and the ADSs will continue to be traded on the New York Stock Exchange.

The merger's targeted savings will come in part from layoffs: Alcatel and Lucent plan to reduce their combined workforce by about 10%. That's 8,800 jobs, based on the combined companies' headcount of 88,000.

The merger will also create about $1.7 billion in new cash restructuring charges, to be recorded primarily in the first year.

Patricia Russo, current chief of Murray Hill, N.J.-based Lucent, will become CEO of the new company, which will locate its headquarters in Alcatel's home base of Paris. Serge Tchuruk, who is Alcatel's CEO, will become non-executive chairman.

The deal is likely to kick off a round of consolidation among telecom equipment makers, whose customers, the big telcos, have been on a merger binge of their own, leaving the equipment shops with smaller orders from fewer customers. The thinking is that merger-related cost savings will help the equipment makers better cope with this new reality.

In addition to cost savings, the companies say they will benefit from combining their research efforts as the telecommunications industry confronts rapid change.

"The communications industry is at the beginning of a significant transformation of network technologies, applications and services -- one that is projected to enable converged services across service-provider networks, enterprise networks and an array of personal devices," said Lucent's Russo in the press release. "This presents extraordinary opportunities for our combined company to accelerate its growth."

The deal could face tough political and regulatory hurdles, however, analysts have warned. Some politicians may feel uncomfortable about having foreign control of a company that has supplied lots of telecommunications equipment to the federal government.

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