Telecom

Introduction The French leading telecommunications industry Telecom update, France Telecom's aims and ambition Lucatel? Telecom equipment: birth of a giant

•  39% of DSL market worldwide - clear leadership
•  23% of global optical transmission (terrestrial + submarine) - clear leadership
•  19% of global mobile market, across different standards - number two position
•  20,000 service employees - largest in the world in terms of employees but second to Ericsson in terms of sales

The merged company will have pro forma sales of €22Bn in 2006 and employ some 88,000 people. The parity for the merger indicates that Alcatel shareholders will own 60% and Lucent 40% of the new group. As the two companies describe the deal as a merger of equals, the split between management control is strictly divided. The company will be headed by Patricia Russo, current CEO of Lucent, while Serge Tchuruk, current CEO of Alcatel, will become non-executive chairman of the Board. The Board will consist of 14 members of which 6 from Alcatel, 6 from Lucent and 2 independent EU directors to be decided upon mutually. The 60/40 ratio is represented however through other features, notably that the headquarters will be in Paris and that Alcatel management dominate the management committee and division heads.

Management have announced a first projection of €1.4Bn in annual pre-tax cost synergies to be reached within 3 years. This figure, emphasised management, takes account of the 10-15% annual price decrease that characterises the industry. The synergies will be achieved primarily through headcount reduction: 8,800 positions, or 10% of the current combined workforce. To maximise the impact, the headcount reduction is most likely in high labour-cost countries such as Europe and North America. Other synergies are expected from combining support functions, supply chain optimisation, procurement and leveraging the extensive R&D (26,100 engineers combined).

The combined group’s geographic reach would be well balanced, with one third of sales in Europe, one third in North America and one third in the rest of the world.

Concerns about the two groups’ involvement in their national security through their respective defence and security divisions appear to have been addressed. A separate board and management team will be created for Bell Labs, in agreement with the US government. Alcatel’s board has agreed to the transfer of assets to Thales, the French defence leader. We believe that this will involve particularly the Space activities of the Alcatel-Alenia JV. EADS’s push to participate in the deal and bring its own Astrium operations may delay the deal somewhat but should be broadly positive for the industry.