Alcatel's U.S. Dream

Lucent was an idol--now it's a target

It has long been Serge Tchuruk's American dream. When France's natty Mr. Fix-it arrived six years ago at the formerly state-owned hodgepodge of businesses known as Alcatel, he knew a lot more about oil than fiber optics. But it didn't take Tchuruk long to single out one target, one vision of excellence, one symbol for everything France's Alcatel should aspire to be. It was a new spin-off from AT&T called Lucent Technologies Inc. That was the company Tchuruk wanted to benchmark Alcatel against. It seemed farfetched: Lucent was operating at the heart of America's Internet economy and was a darling of Wall Street and the home of legendary Bell Laboratories.

Alcatel? It was a work in progress, at best. Tchuruk, whose first move when he arrived in 1995 was to announce a $5 billion loss, sold off scores of businesses, from vineyards to nuclear power, to focus on telecommunications equipment. He nudged researchers toward the Internet, pushed English as the company language. But catch up with high-flying Lucent? Not a chance.

RESCUE. Somebody go pinch Serge Tchuruk, because his American dream just may come true. The once-proud Lucent is now in trouble, a victim of botched management and bad bets. And it's Alcatel that's hurrying to Lucent's rescue. On May 22, the boards of both companies agreed to further consider Tchuruk's proposal: a $34 billion stock takeover.

Make no mistake: This is a combination borne of weakness. Alcatel's an also-ran in the all-important U.S. market, and Lucent's sinking fast. Together, if this deal goes through, they have a chance to survive the coming shakeout. But riches or domination? They're a long way off. Yet despite Lucent's many troubles, Tchuruk sees a chance to create a $60 billion behemoth. Lucent holds 50% of the market in traditional switching equipment in the U.S., while Alcatel has 65% of that market in Europe. Combining the two would produce huge savings. "That combination alone is really exciting," says telecom equipment analyst Paul Johnson of Robertson Stephens.

But the heart of the combined company will be in the U.S., which accounts for 40% of global telecom spending. Most U.S. phone companies stick to two vendors, usually an entrenched supplier like Lucent or Nortel, and a friskier one with Net savvy--maybe Cisco, Juniper Systems, or Ciena. Alcatel, neither entrenched nor frisky, has only 22% of the U.S. market.

Now, instead of beating Lucent, Tchuruk's content to buy it. The payoff: access to long-distance providers such as AT&T and regional giants like Verizon Communications, which controls 30% of local lines in the U.S. Alcatel, having captured 90% of the U.S. digital subscriber line market, could bring something to Lucent's product stable as well. The deal would also resolve the burning issue of who will replace Chief Executive and Chairman Henry B. Schacht, who came out of retirement to run the company last October after the board fired his protégé, Richard A. McGinn.

The question is whether Lucent may be selling out too cheap. The stock, after all, is trawling near its historic low. The Alcatel deal gives investors no premium at all. "If I were on the board," says Jeff Heil, director of equity investments for the Regents of the University of California, who sold 11 million shares of Lucent six weeks ago, "I would vote to bring in some new talent at the top and go it alone." If Lucent's board opts for this route--and analysts rate the chances 50-50--a host of new buyers could descend on the troubled company. These could range from Germany's Siemens to JDS Uniphase.

Though it's easy to see why Tchuruk is targeting Lucent, what a headache it would be for him to bring it all together. "This would be the largest tech merger ever," says Lehman Brothers Inc. analyst Steve Levy. And even if Tchuruk pulls it off, he's left with a titan in telephone technologies--but a laggard in the Internet and wireless businesses dominated by Nortel, Cisco, Ericsson, and Nokia.

Of the two, Lucent is in far more dire shape. The company is teetering under heavy debts and canceled orders. It announced operating losses last quarter of $1.8 billion. By comparison, the $27.6 billion Alcatel is faring just fine: At least it's still in the black, having eked out earnings of $184 million in the first quarter, despite gaping losses in cell phones.

But Alcatel's relative health, paradoxically, is grounded in two weakness, its thinness in America and on the Net. Fact is, the U.S. tech distress has not yet crossed the Atlantic. It's thanks to the lag that Alcatel's market cap sits above Lucent's, $37 billion to $34 billion. This, along with his cleaner balance sheet, gives the 63-year-old Tchuruk the upper hand.

A bigger obstacle to Tchuruk nailing down a Lucent deal is more likely to be political than financial. Even the possibility of a French takeover of Bell Labs is already stirring resistance in Congress. Senator Robert G. Torricelli (D-N.J.) warns that concerns over foreign control of "sensitive technology" could kill the deal.

EVIL TWINS. Alcatel investors are certainly holding back their applause for the deal. Since news of the negotiations filtered into the press on May 18, Alcatel shares have slid 6%. The concern is that the merger could overtax Tchuruk and his Texas-based chief operating officer, Krish Prabhu. And morale would likely sag. The companies compete in 75% of their offerings: Thousands of job cuts would be inevitable. "All of us will have evil twins somewhere in the organization," predicts one Alcatel engineer.

At least the merged company would be a focused global player, more American in character than French. That's because Tchuruk has been Americanizing Alcatel steadily since his arrival from oil giant Total Fina Elf. To get his piece of the Internet equipment business, Tchuruk spent $17 billion for a handful of companies, most notably Xylan Corp., a networking company in Los Angeles, and Newbridge Networks Corp., a Canadian specialist in digital switches.

The deals taught Tchuruk a sobering lesson: The first instinct of American engineers, especially when dot-coms were still hot, was to run from a lumbering equipment maker, especially a European one. To hold on to his New Economy workforce, Tchuruk gave the U.S. subsidiaries wide berth and offered stock options. "We're not really a French company anymore," he said in a BusinessWeek interview last year. For Serge Tchuruk, America is the promised land. But even if he does pull off a Lucent deal, Tchuruk's work in the New World isn't going to get any easier.

By Stephen Baker in Paris and Steve Rosenbush in New York, with Andy Reinhardt in Paris

— With assistance by Andy Reinhardt

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