Big cuts spell bigger-than-expected merger benefits for Alcatelundefined and Lucent (LU) .
In outlining the $13.4 billion deal, executives at the two telecom equipment giants said Monday that they expect to cut about 8,800 jobs. The 10% cutback will contribute about half of the $1.69 billion in so-called cost-saving synergies to be realized in the three years after closing.
Though dramatic job cuts were expected, Wall Street was a little surprised by the amount of expense savings the hard-charging executives claimed could be gained in the deal.
Many analysts expected about $1 billion in synergy benefits, and some had even estimated that in a best-case scenario, Alcatel and Lucent could get about $1.4 billion in cost reductions after integration.
If Alcatel and Lucent's claims to steeper savings are true, industry observers expect that the financial logic will become contagious and add even more impetus to a new round of network-gear-maker mergers.
With revenue and customer lists shrinking, industry observers say, the squeeze is felt sharply across the telecom equipment sector. The merger route is often the quickest way to big cuts, they say.
"This puts a lot of pressure on the market-share losers," says Sanford Bernstein analyst Paul Sagawa. "I don't think you can keep pace in 3G or IMS or 'triple play' if you have a de minimis market share."
Sagawa says outfits such as
networks business "will all be under severe pressure and could look to M&A to regain critical mass."
The two companies plan to base their headquarters in Paris and their research and development at New Jersey's Bell Labs. Secretive work that Bell Labs performs for the U.S. government will be handled by a separate subsidiary overseen by three U.S. board members.
Lucent says former CIA chief Jim Woolsey, former defense secretary William Perry and Ken Minihan, a former National Security Agency director, have been named as independent directors of the special snooping unit.
And while the Alcatel-Lucent combination will create a reasonably balanced company geographically, with a third of the business coming from the U.S., a third from Europe, and the remaining from other parts of the world, the executive braintrust will be centered in Paris.
Given the proposed management structure of the combined company, CEO Pat Russo will work out of France. And the board, which will have six seats for Alcatel directors and six seats for Lucent directors, will add two new independent presumably Alcatel directors to reflect the 60% contribution Alcatel made to the pairing, says American Technology Research analyst Albert Lin.
This doesn't bode well for Lucent employees, says Lin.
Of "the 88,000 employees facing a massive layoff plan," says Lin, many "will likely come from Lucent's wireline division more than any other group."
Five years ago, a proposed Alcatel-Lucent deal was killed at the last minute when Lucent executives felt Alcatel was taking too much control of the operation.
Asked Monday why the original merger failed, Alcatel CEO Serge Tchuruk said: "The mayonnaise didn't hold."
But today, the
less luminous Lucent, which managed to fetch a takeover price below its $3.06 Friday stock close, and with few options at its disposal, just might make the mayonnaise hold this time.
Lucent shares rose 3 cents to $3.08, and Alcatel was up 84 cents to $16.24 in midafternoon trading Monday.