Aug. 31, 2006

The proposed merger between Alcatel and Lucent could potentially be cancelled as a French investment advisory company urged Alcatel’s stockholders to vote against the merger.

On Aug. 28, Proxinvest said in a letter sent to fund managers that Alcatel was overpaying for Lucent Technologies.

The French investment firm also said that some of the negotiated changes in the merged companies’ bylaws would make it too difficult to get rid of Alcatel’s 68-year-old chairman and CEO.

“The directors of the company have accepted to replace the usual simple majority vote at the board for any dismissal of the chairman or of the CEO by a two third majority,” the letter said.

Shares of Lucent rose 3.48 percent in recent trading to $2.38. Alcatel shares trading on the New York Stock Exchange rose 4.04 percent to $12.89.

Last April Paris based Alcatel and Murray Hill, New Jersey based Lucent announced that they had agreed to merge and form a single $25 billion company with a customer base that includes many of the top tier carriers around the world.

The newly-minted French company would possess deep roots in the resurgent U.S. telecommunications market, in large part because of Lucent’s long-running relationships with U.S. phone companies, wireless carriers, and the U.S. government.

In the letter, Proxinvest argues that Alcatel does not get credit for its better earnings and “much lighter future pension charges.”

“Alcatel’s management has been obliged to accept an overly generous five Lucent shares for one Alcatel ratio while Proxinvest estimates a fair price to be closer to seven Lucent shares against one Alcatel,” the letter said.

“A ‘no’ vote on this too expensive merger would allow Alcatel - unless a better deal was agreed with Lucent - to consolidate its recovery under the designated successor of CEO Serge Tchuruk,” the letter concluded.

The U.S. telecommunications market is currently on an upswing as wireless service providers have been upgrading their networks for data and video transport. Both Lucent and Alcatel are major suppliers of the top tier mobile carriers.

Source: Red Herring