Feb. 9 (Bloomberg) -- Alcatel-Lucent, the world's biggest maker of telecommunications equipment, will increase its planned job cuts by 39 percent to 12,500 after reporting a fourth-quarter loss and declining revenue.

The reduction amounts to 16 percent of the workforce and will help save 1.7 billion euros ($2.2 billion) over three years. Paris-based Alcatel-Lucent originally planned to shed 9,000 workers after the $11.6 billion merger that created the company last year. The net loss in the quarter was 618 million euros, the company said.

Alcatel SA and Lucent Technologies Inc., unable to revive sales or their share prices since the technology bubble burst in 2000, combined last year to fend off increased competition from China's Huawei Technologies Co. and Sweden's Ericsson AB. Competition in wireless markets and reduced spending by U.S. clients created a ``challenging'' quarter, the company said.

``You have to reduce costs, and that's done by shedding jobs,'' said Andre Chassagnol, an analyst at HPC Paresco in Paris. ``The first quarter will be even worse.''

Shares of Alcatel-Lucent fell 1 cent, or 0.1 percent, to 10.14 euros in Paris. The stock has lost 15 percent in a year. The dividend for 2006 will be 16 cents, unchanged from the previous year, for a dividend yield of 1.5 percent.

``The announcement of a dividend is a surprise, and gives confidence for the year,'' said Julien Quistrebert, an analyst at Richelieu Finance in Paris, which manages about $5 billion. ``The results were more or less expected. They were very bad.''

Savings Target

Alcatel-Lucent, which makes equipment from wireless base stations to network software, now targets pretax cost savings of 1.7 billion euros over three years, an increase from 1.4 billion euros in merger savings expected previously.

``These are difficult but necessary decisions,'' Chief Executive Officer Patricia Russo, 54, said in the statement. ``We are committed to serving our customers' needs, with a competitive cost structure and effective operating model.''

The combined company had about 80,000 employees at the end of 2006. Alcatel-Lucent's French unions have called for a strike on Feb. 15 to protest the workforce reductions.

``We don't contest that there is a ferocious price war,'' said Jean-Baptiste Triquet of the Confederation Francaise Democratique du Travail, who speaks on behalf of the five main French unions represented within Alcatel-Lucent. ``The response is not fitting.''

Fewer Products

Alcatel-Lucent will cut costs in its supply chain, eliminate duplicate jobs within the combined company and reduce the number of products the company sells, Russo said. The company declined to give a breakdown of the job cuts by geography or function.

``It's inevitable that there is overlap between the two companies,'' said Gregory Moore, who manages about 100 million euros at Montsegur Finance in Paris, including Alcatel shares.

The company expects 55 percent of the planned cost savings to result from job cuts, with the remainder related to process improvement and products. Alcatel-Lucent estimates the cash restructuring costs will be 1.6 billion euros, with 900 billion euros of cash payments in 2007, Russo said.

Credit default swap contracts based on 10 million euros of Alcatel debt fell 2,000 euros to 90,000 euros, according to Deutsche Bank AG. Credit-default swaps are based on corporate bonds and are used to speculate on a company's ability to repay debt. A decline indicates improving credit quality.

Sales Fall

The company's fourth-quarter net loss of 618 million euros, which includes restructuring costs and writedowns of 577 million euros, compares with profit of 381 million euros a year earlier.

Alcatel-Lucent broke even on the operating level in the quarter, compared with operating profit of 566 million euros a year earlier. Pro-forma sales, which assume the merger was in place at the start of 2006, fell 16 percent to 4.42 billion euros from a comparable 5.25 billion euros a year earlier.

``The infrastructure business continues to drag its feet,'' said Pierre-Yves Gauthier, an equity strategist at Oddo & Cie. in Paris. ``There has been a consolidation movement in the U.S. among telephony operators, which has reduced the business in terms of demand for investment.''

Gross profit as a percentage of sales fell to 31.9 percent in the quarter from 38 percent a year earlier and was 37 percent for all of 2006. ``As the year 2007 progresses, you'll see the margin benefit from the elements of this merger,'' Beaufret said.

Full-year net income fell to 522 million euros from 1.67 billion euros a year earlier, while sales slipped 1.7 percent to 18.3 billion euros.

Forecasts

The company expects 2007 sales growth to be ``at least 5 percent,'' Beaufret said. Alcatel-Lucent forecasts the carrier market will grow about 5 percent this year, and expects to do at least as well or better, the executive said.

First-quarter sales will probably drop from a year earlier, Russo said. ``We absolutely believe that the company will resume growth as we go though the year,'' she said.

To contact the reporter on this story: Rudy Ruitenberg in Paris at rruitenberg@bloomberg.net.

Last Updated: February 9, 2007 11:38 EST