Alcatel, Lucent Announce Merger

Alcatel SA and Lucent Technologies Inc. announced Sunday that they had signed a merger agreement, creating one of the largest telecom equipment makers in the world and setting in motion the long-awaited consolidation of the telecom equipment sector.

The combined company, whose name is to be decided at a later date, will be Paris-based and will have an American CEO. The new entity will have annual revenue of approximately €21 billion ($25 billion) and cost savings will hit $1.7 billion annually within three years, the companies said.

The merged company would be one of the world's leading manufacturers of the switches, electronics and other gear behind telecommunications networks. It would also feature one of the largest global research and development capabilities in the sector.

Alcatel's Serge Tchuruk will be non-executive chairman of the combined entity, while Patricia Russo, Lucent's current chief executive, will be the new entity's CEO, based in Paris. Together, the two companies today employ about 88,000 workers throughout the globe, although executives said they plan to cut about 10% of the workforce.

In a conference call Sunday, Ms. Russo said the two companies are "taking a fair and balanced approach" to the job cuts. Roughly 30% of the cost reductions will be achieved in the first year, and 70% will be achieved by the second year, she added.

Its board will have five members from Alcatel's current board, five from Lucent's current board, as well as Ms. Russo and Mr. Tchuruk. The board will also appoint two new independent members who are European in nationality, the companies say.

Under the terms of the deal, Alcatel will exchange 0.1952 of its American depositary shares for each share of Lucent. Based on Friday's closing prices, the deal values each share of Lucent at $3. Upon completion of the merger, Alcatel shareholders will own about 60% of the combined company and Lucent shareholders will own 40%. The deal has a break-up fee of $500 million, which would be charged to the side that withdraws from the deal, Ms. Russo said.

The announcement comes after Alcatel and Lucent disclosed March 23 that they were negotiating a ''merger of equals.'' France's Alcatel has more revenues and employees, but Lucent, based in Murray Hill, N.J., is slightly more profitable.

Telecom Merger Trend Spills Over In Equipment

The deal is a clear sign that the merger trend that swept operators of telecom networks in recent years is spilling over into the equipment industry. The value of deals in the U.S. alone has been over $200 billion, as companies like Verizon Communications Inc. merged with MCI Inc. and SBC Communications Inc. acquired AT&T Corp.

As the carriers have grown larger, they have gained more leverage over the equipment makers putting pressure on them to merge as well. At the same time, competition also has been growing in the telecom equipment market. New Chinese companies like Huawei Technologies Co. and ZTE Corp. are gaining market share by cutting prices. Customers also are being lured away by telephone systems operating on Internet technology sold by Cisco Systems Inc. and others.

Lucent and Alcatel, which came close to a deal in 2001, have been considered to be natural merger partners because they have overlapping product lines and different strengths. More than two-thirds of Alcatel's business comes 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.

Almost two-thirds of Lucent's sales come from the United States, and it has a growing business in servicing telecom networks, whether they include Lucent equipment or not. Lucent specializes in the CDMA wireless technology, which is widely used in the U.S., and is a major supplier to Verizon Wireless and Sprint Nextel Corp. Lucent, which descended from the AT&T monopoly, also maintains close contacts with the major U.S. telephone companies.

The deal still must be approved by regulators in both countries and may face hurdles in the U.S. because of the classified work that Lucent's Bell Labs division does for the Pentagon and security agencies. Political opposition has resulted in scuttling other cross border deals such as China's CNOOC Ltd.'s offer for Unocal Corp. and Dubai Ports World's plans to take over operations of large U.S. ports.

In a move apparently aimed at addressing any security concerns about Bell Labs, the companies said they planned to form a separate, independent U.S. subsidiary holding contracts with U.S. government agencies. The unit would be separately managed by a board of three U.S. citizens acceptable to the U.S. government, the companies said.

If the merger is finalized, pressure would likely grow on other equipment manufacturers to merge. Analysts have speculated that other companies that may do deals include Nortel Networks Corp., of Canada; Siemens AG, of Germany; and Telefon AB L.M. Ericsson, of Sweden.

The issue of what Alcatel will do with its satellite business, and whether it will sell it to French electronics firm Thales, has not been resolved. Alcatel said it would continue negotiations over the issue, which has become embroiled in concerns from the French government and rival defense firm EADS.

Write to By Sara Silver at sara.silver@wsj.com, Leila Abboud at leila.abboud@wsj.com and Dennis Berman at dennis.berman@wsj.com