Alcatel Needs to Convince Market of Solo Plans

French telecoms equipment maker Alcatel must show it can be a global player on its own after abandoning a merger with U.S. rival Lucent that could have offered high rewards but which investors found too risky.

Many analysts question whether Alcatel can overcome through organic growth alone flagging orders in an industry where many operators have huge debts and where competition is fierce.

"This was a unique opportunity. It would have been a high-risk, high-reward operation with long-term industrial logic and Alcatel will need to find something else to do," said fund manager Benoit Flamant at IT Asset Management. "It's not clear what the alternatives are, there are not many around."

Besides creating a group that could have provided global solutions to telecoms operators, integrating Lucent would have made Alcatel a strong second in the lucrative U.S. fibre optics networks market to Canada's Nortel Networks.

It would also have added the U.S. CDMA mobile phone technology standard to Alcatel's GSM mobile infrastructure base and would have helped the French company in its bid to increase U.S. sales from the current 22 percent of turnover.

Highlighting the difficulties it faces, Alcatel forecast late on Tuesday that operating profit in its telecoms divisions would slip this year and saw sales up only a few percent. Alcatel Optronics, also cut its full-year outlook.

The company said it expected a second-quarter net loss of some three billion euros due to one-off writedowns, inventory depreciation and restructuring costs.

The stock fell to 29.1 euros, its lowest since November 1999 and making a 52 percent fall this year.


Immediately after talks collapsed, Alcatel unveiled a strategy focusing on networking, optics and space.

In a conference call on Wednesday, Chief Executive Serge Tchuruk played down Alcatel's need to chase acquisitions to boost its U.S. presence and said the firm did not need to consolidate, even though others in the industry probably would. Others were unconvinced.

"It is hard to believe that Alcatel, having made such a dramatic statement by moving into talks with Lucent will be content to watch others shape the industry through their own mega deals. (This) is clearly not the end of Alcatel's ambitions," Goldman Sachs analysts said in a research note.

Fund managers and analysts cheered the plans to spin off its enterprise business unit, which provides communication platforms for corporate clients, so that it can focus on the service provider network activities it sells to operators.

"The industry is very different today to a few years back," said Flamant. "Equipment makers used to want to do everything but today we are seeing more specialisation as they realise they can't be good everywhere."

Alcatel's networking and optics divisions work well together as they share a lot of clients and can benefit from economies of scale in marketing and distribution. and telecoms activities already represented 85 percent of 2000 turnover at Alcatel.

"Alcatel will be concentrating on second-half profitability but medium-term it will still be looking to up its market share in the U.S.," said fund manager Arnaud Bardin at B+Capital, part of BNP Paribas Equities.

The group is also in the process of floating 70-100 percent of its Nexans cables division and outsourcing handset manufacturing, keeping a 1,000 strong mobile phone sales team.

"Divesting e-business will be good news for Alcatel which would then be focused purely on telecoms. The market has been concerned for a long time that Alcatel is present in too many areas," said analyst Manuel Lachaux at brokerage.