Alcatel and Lucent Technologies said yesterday that they had reached agreement on a $13.4 billion merger that would create a French-American maker of telecommunications equipment with revenue of $25 billion, 88,000 employees and phone company customers across the world.
The deal comes in response to the increasing competition Western telecommunications firms are facing from low-cost Asian manufacturers, as well as the growing size and purchasing power of a few large phone companies. If Alcatel and Lucent are successful at combining their far-flung operations, which analysts say will be a significant challenge, it could prompt competitors like Ericsson, Nortel Networks and Siemens to seek their own deals so they can keep up.
The combined company, which has yet to be named, would be based in Paris, where Alcatel has its headquarters. Lucent's legendary Bell Labs research center would remain in Murray Hill, N.J. Serge Tchuruk, Alcatel's chairman and chief executive, would be the nonexecutive chairman, and Patricia F. Russo, Lucent's chairman and chief executive, would become chief executive of the new company.
Executives said they would lay off about 9,000 people, or 10 percent of their combined staff, in the next three years as part of an effort to cut costs by $1.7 billion. The companies did not provide a geographic breakdown of the job cuts, but they said the cuts would be spread out fairly. Lucent also dismissed concerns of employees and retirees about the fate of its pension plans, saying they were financially healthy.
The job cuts would be the first of numerous cross-cultural challenges faced by the companies, said Gerald R. Faulhaber, a management professor at the Wharton School at the University of Pennsylvania and a former Bell Labs researcher. It may take the companies several years to combine product lines, employee teams and executives dispersed around the world who are used to different ways of doing business, he added.
"These are not going to magically fit together, particularly when you have a cross-border merger," Professor Faulhaber said. "Sometimes it's costly and takes time to resolve, and sometimes they never get resolved."
Alcatel and Lucent ended earlier merger talks in 2001 after executives could not agree on how to share control of the combined company. Since then, both companies have cut tens of thousands of jobs as they struggled to recover from the demise of many of their customers.
Under the deal, Lucent shareholders would receive 0.1952 of an Alcatel American depository share for each Lucent share, valuing the company at about $3.01 a share based on Alcatel's closing stock price on Friday, or about 4 cents less than Lucent's Friday closing price. After the merger, Lucent shareholders would own 40 percent of the combined company, with Alcatel shareholders owning 60 percent.
To allay concerns about a foreign company having access to the secretive work Bell Labs does for American defense and intelligence agencies, the companies said they would create an independent subsidiary that would be overseen by a board of three American citizens. Defense contractors in similar situations frequently use such corporate structures to assure government officials that classified research is not available to foreign powers.
A Lucent spokeswoman declined to say how big the subsidiary would be in terms of revenue or employees.
In France, the company would assign European citizens to sit on the board of Thales, a satellite manufacturer which Alcatel jointly owns with the French government and other investors. Alcatel also said it was continuing to negotiate a merger of its own satellite business with Thales.
The combined Alcatel and Lucent board would have 14 directors, including six members each from Alcatel and Lucent, some of whom are already on their current boards; Mr. Tchuruk and Ms. Russo would be among those six. The boards of both companies would also jointly appoint two new directors who are European to add more international diversity, Mr. Tchuruk said on a conference call with reporters and analysts.
Lucent and Alcatel executives said the merger would create a research-and-development powerhouse with a leading position in the two fastest-growing areas of telecommunications — wireless and broadband Internet access. "This is an R.& D.-intensive industry and competition is increasing, and size and scale really matter," Ms. Russo said.
Mr. Tchuruk said that the companies' sales were divided in thirds among Europe, North America and the rest of the world. "There is practically no customer large or small that is not being reached by Alcatel and Lucent," he said.
As measured by revenue, the combined company would be slightly bigger, but far less profitable, than Cisco Systems, the maker of Internet routers and related equipment.
The deal was approved by the boards of both companies over the weekend and is expected to close in 6 to 12 months. It has to be approved by the companies' shareholders and regulators in Europe and the United States, including the Committee on Foreign Investment in the United States, overseen by the Treasury Department, and the Justice Department's antitrust division.
Though lawmakers in Congress have so far not expressed significant concerns about the deal, some experts say the merger could face scrutiny given Bell Labs' legacy.
Created in 1925 by AT&T as a research subsidiary, Bell Labs has helped develop a wide range of commercial and military technologies, from the transistor to ballistic missiles. The labs became a part of Lucent when the company was spun out of AT&T in 1996.
There could be other problems in Washington given the rise in protectionist sentiments, as demonstrated by the furor over a Dubai company's proposal to take over terminal operations at six American ports.
The French government is expected to take a more accommodating position given that the combined company would be based in Paris. It would, however, take longer to cut jobs in Europe, where worker protections and unions are stronger.
The Lucent Retirees Organization, a group that represents former workers, has expressed concerns about the merger's impact on the company's pension plans, saying it would ask the government to oppose any deal that does not include independent oversight of retiree benefits.
Lucent officials said yesterday that with assets of $34 billion, the company's pension plans were overfunded by $3 billion, and that it did not believe it would have to contribute to the funds until 2008.
But the retirees' group said the surplus was entirely in the pension plan for union retirees, while the plan for about 50,000 management retirees was underfunded by about $1.2 billion. "We are not fighting the merger," said Ken Raschke, the group's president. "All we are saying is we want protection from it."
