As French telecom-equipment giant Alcatel and U.S.-based Lucent prepare for Sept. 7 shareholder votes on a planned merger of the companies, critics are warning the merger could be a bad deal for investors.
Proxinvest, a shareholder-rights consultant to leading French institutional investors, disclosed this week that it has advised clients to vote against the $10.5 billion merger. The Paris-based group says Alcatel (ALA
) is overpaying for Lucent (LU
), which suffered a 79% third-quarter earnings drop and a roughly 20% slump in its share price since the merger plan was announced on Apr. 2 (see BusinessWeek.com, 4/3/06, "Alcatel and Lucent: A Global Logic").
While the agreement values Alcatel shares at about five times those of Lucent, the ratio should be closer to seven to one, Proxinvest chief Pierre-Henri Leroy contends. Leroy also faults the deal on corporate governance grounds, including overly generous job protections for Alcatel Chairman and Chief Executive Serge Tchuruk, who would become the combined companies' non-executive chairman. "In too many ways, this deal is just too expensive for Alcatel shareholders," Leroy says.
INJUNCTION CONSIDERED. On the other side of the Atlantic, some Lucent shareholders are pursuing a class-action lawsuit contending just the opposite—that they will get too little from the merger. A New Jersey state court is set to rule Sept. 6 on their request for an injunction to postpone a Lucent shareholder vote the following day.
Despite the 11th-hour fireworks, the deal still looks like it will be approved by the required two-thirds of Alcatel's shareholders and 50% of Lucent's. The big French investment funds advised by Proxinvest, including the asset-management divisions of banks Crédit Agricole and Société Générale, account for less than 15% of Alcatel shareholdings.
As recently as a few days ago, several big funds were considering a "no" vote, primarily because of concerns over corporate governance, says a Paris market insider who has talked with the funds' managers. But most now are leaning toward giving the deal a green light despite Proxinvest's opposition, he says.
VIGOROUS DEFENSE. Alcatel and Lucent are mounting a vigorous defense of the merger, under which Lucent CEO Patricia Russo would run the combined companies while Tchuruk would be non-executive chairman. "The telecoms sector is undergoing a rapid and profound transformation. We are merging to become the leader," Tchuruk said in an interview on Aug. 31 in the Paris business daily Les Echos. Lucent representatives also have spoken out in support of the deal, and have said that the investors' lawsuit is "without merit."
The merger has won the endorsement of Maryland-based Institutional Shareholder Services, the world's biggest corporate governance and proxy-voting adviser. While Lucent's recent stumbles could have some short-term effect, they do not affect "either the projected cost and tax synergies or the strategic rationale for the merger," the group said in a note to its clients.
The two companies, with combined sales of about $25 billion, have said they expect to achieve $1.7 billion in cost savings within three years. Rémi Thomas, an analyst with Paris-based brokerage Cheuvreux, says that while Alcatel is paying a steep premium in the short term, he expects the new company's earnings per share to rise 20% by 2008. Scuttling the merger would be "a major step back for Alcatel in an industry that's desperately in need of consolidation."
SIGNS POINT TO YES. Indeed, telecom equipment manufacturers worldwide are scrambling to find partners. Finland's Nokia (NOK
) and Germany's Siemens (SI
) recently announced plans to fold their equipment businesses into a joint venture (see BusinessWeek.com, 6/19/06, "Nokia, Siemens Plan to Join and Conquer").
Even critics agree that the Alcatel-Lucent union makes some strategic sense. Alcatel would boost its presence in the all-important U.S. market, while Lucent would benefit from Alcatel's superior strength in broadband and other technologies. "I can see the rationale for the deal," says Richard Windsor, a London-based analyst with Nomura International. "Alcatel is a bigger, better company than Lucent. The real issue here is valuation." But as far as the merger is concerned, it looks as if it will be one step closer on Sept. 7.