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Alcatel-Lucent: And Now the Hard Part

News Analysis By Robert Liu
TMCnet Wireless and Technology Columnist

October 2006, Volume 9/ Number 10


With nearly all of the is dotted and the ts crossed on the $11 billion Alcatel-Lucent Technologies (News - Alert) merger, the two telecom equipment manufacturing (TEM) giants that set the wheels of consolidation in motion are just now getting to the hard part.

Since April 2, when the deal was announced, Serge Tchuruk of Alcatel and Lucent’s Patricia Russo have been on a mission to convince shareholders that the whole is greater than the sum of the parts. On September 7, Alcatel and Lucent finally won shareholders approval and executives still believe they are on track to complete the transaction by the end of this year. As of press time, the only approval still required was from the U.S. Treasury Department’s Committee on Foreign Investments in the United States.

But despite the Herculean task of selling the deal to investors, officials are still looking at 12 to 18 months of hard work in order to realize the $1.7 billion (€1.4 billion) that has been promised in cost synergies. And that’s just to achieve operational efficiencies.

“Product development takes a couple of years. You have a much longer period before you can attain those product efficiencies,” said Phil Marshall, vice president, Wireless Mobile Technologies, Yankee Group (News - Alert).

While an integrated product portfolio remains an important driver, especially in light of industry commoditization and the ongoing convergence of fixed and mobile solutions, analysts concur that scale remains the most salient rationale for the Alcatel-Lucent combination.

“Everyone is focusing on market share,” explained Peter Jarich, Principal Analyst Wireless Infrastructure at Current Analysis.

In covering the telecom equipment market, I get the feeling that, before long, I’ll be writing about only one big company. After all, the Big 8 vendors are already dwindling down to just five in the 3G business. Following Ericsson (News - Alert)’s acquisition of Marconi last October, the Alcatel-Lucent deal set into motion Nokia (News - Alert)’s telecom equipment joint venture with Siemens (News - Alert) in June and Motorola (News - Alert)’s partnership with Huawei (News - Alert) a month later.

“Analyzing the comments from all the major wireless infrastructure vendors leads us to believe that competition in the industry remains tough with pricing pressures due to aggressive bidding by the likes of Huawei, worsening emerging market mix, and lower-margin services business gaining in importance,” wrote Gareth Jenkins, analyst at Deutsche Bank.

But it’s exactly that type of scale that will enable these companies to act as an oligopoly to negotiate more favorable terms with customers and suppliers. Indeed, reverberations have already been felt from the TEM consolidation as evidenced by Harris Corporation folding its Microwave Communications Division into Stratex Networks (News - Alert) to form the leading provider of mobile cellular solutions.

“Really, this consolidation is certainly about product portfolios and filling geographic regional gaps but it’s also about outright scale,” Marshall told INTERNET TELEPHONY.

On top of the market leverage, Alcatel and Lucent are hoping to capitalize on operational efficiencies realized by combining the sales and marketing, IT, HR, and finance organizations, as well as other corporate activities. But, while operations will likely dominate the bulk of the merger integration, the product pipeline runs the risk of languishing in the wake of neglected R&D spending. Analysts like Marshall don’t expect to see the fruits of an integrated product portfolio until the 2009-2010 timeframe. By that time, 4G technologies, like WiMAX or other OFDM technologies, are expected to be up and running.

“You have to be either on the bleeding edge of mainstream technologies or take advantage of a niche,” Marshall explained.

To be sure, Alcatel does have a niche in the form of 2G that serves as a proverbial foot in the door. Although its 3G practice was relatively weak, Alcatel fortified its portfolio considerably when it recently reached an agreement to acquire the UMTS radio access assets of Nortel (News - Alert) for $320 million.

“Alcatel isn’t a big player in the UMTS business, but they’ve been doing really well in GSM,” Jarich said. “It’s been hard for someone to gain HSDPA business that they don’t already have. Now there are still a lot of operators that still haven’t picked their vendors so there’s still a lot of opportunity. But it’s been a hard market to break into.”

Because pre-existing customer relationships are so critical when it comes to building out an operator’s technology roadmap (as Nortel’s CEO Mike Zafirovski recently acknowledged), some analysts speculate that Nortel could shed even more wireless assets, like core or CDMA, to a combined Alcatel-Lucent, especially given the strength of Lucent’s CDMA practice.

“You didn’t have the right channels to be successful in 3G, then how can you have the right channels in 4G?” Jarich pondered.

Still others are also being left out in the cold. With Siemens now tied up with Nokia, NEC (News - Alert) may now be hard-pressed to find a replacement. “There are about 100,000 base stations that are NEC-Siemens” still on the market, Marshall added. IT

Robert Liu is Executive Editor at TMCnet and a regular contributor to Internet Telephony Magazine. Previously, he was Executive Editor at Jupitermedia and has also written for CNN, A&E, Dow Jones and Bloomberg.

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