Will China Buy Bell Labs?

Alcatel shares surge on Chinese bid talk, upgrade

Reuters
August 31, 2009

Alcatel-Lucent SA shares jumped 16 percent Wednesday as traders cited market talk of a possible bid from a Chinese manufacturer of telecommunications gear and a rating upgrade by Natixis.

A spokeswoman for the Franco-American company declined to comment on the share price move.

The company’s market capitalization is about 6.3 billion euros ($8.9 billion), based on its Aug. 26 share price of 2.727 euros. Based on the average 35 percent premium that technology deals have fetched in recent months, Alcatel-Lucent could fetch about 8.5 billion euros ($12 billion) if sold.

Alcatel-Lucent has been struggling to turn a profit since its creation in a merger in 2006, which was supposed to help it cut costs and better compete with the new generation of Chinese gear makers including Huawei Technologies Co Ltd and ZTE Corp, which have much lower cost structures.

Spokespeople for ZTE and Huawei said they had not heard of any bid for Alcatel-Lucent.

Alcatel-Lucent said Wednesday it signed a CONTRACT WITH CHINA TELECOM Corp Ltd to provide and maintain networks in 10 Chinese provinces. The contract is part of the $700 million agreement recently signed by the two companies.

A Chinese bid for Alcatel-Lucent could run into regulatory problems because of its role via Bell Labs AS A GOVERNMENT AND MILITARY CONTRACTOR in the United States, analysts said.

“I don’t believe that such a deal would really be possible,” said Eric Beaudet, an analyst at Natixis.

Alcatel-Lucent is also likely to be wary of another merger after the rough ride it had integrating its purchase of Lucent in 2006.

The company struggled to cut costs rapidly after the merger because it could not drop overlapping products for fear of losing customers, and cultural clashes among top FRENCH and American managers did not help.

Some analysts think the Franco-American company has turned a corner and might reach profitability soon.

Natixis analyst Beaudet upgraded Alcatel-Lucent on Wednesday to “buy” from “reduce” and increased its price target to 3 euros per share from 1.80 euros, citing improvements in its CDMA wireless business and the sense that the integration of Lucent was nearly complete.

Huawei and ZTE have been aggressively expanding overseas mostly through organic growth and have been taking share from rivals. Analysts said it was not clear whether they had any plans for acquisitions.

“Chinese firms including ZTE are very strong competitors, and have their own substantial R&D operations,” said Ren Wenjie, a telecommunications analyst with First Capital based in Shenzhen in southern China.

“They probably wouldn’t be looking at buying the whole of Alcatel-Lucent, but rather at specific business units that would fit into their long-term strategy.”

Reporting by Leila Abboud, Kirby Chien and Dominic Lau, with additional reporting by Anupreeta Das; Editing by James Regan/Will Waterman and Gerald E. McCormick

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