4/10/2006 -- Watch out, Cisco: Alcatel and Lucent Technologies last week rocked the networking world by announcing a planned merger that (if approved) will create an as-yet-unnamed global behemoth with more than 88,000 employees and a combined market capitalization of approximately $36 billion.

Alcatel and Lucent expect the merger to be finalized in the next six to 12 months.

Analysts say the move is a potentially game-changing one. In spite of Lucent's comparatively feeble financial performance ($9.44 billion in 2005, compared with Alcatel's $15.9 billion), the combined entity could be much greater than the sum of its parts. "[It] creates a [company] with a comprehensive portfolio and a series of claims to the number one or number two positions in a variety of markets," writes Ken Rehbehn, a research director for telecom infrastructure with consultancy Current Analysis. "While the combined company is not going to be a new leader in any specific market, the increase in scale and a combined IPR portfolio may give service providers and mobile operator's confidence in the combined entity. More telling, it will trigger further merger and acquisition speculation that could harm momentum at other companies."

In a certain sense, Rehbehn notes, the merger marks the union of two tested survivors. Both Alcatel and Lucent, after all, emerged scarred but more or less intact from the bursting of the telecom bubble earlier in the decade.

"Alcatel [came] through the trying period with a robust portfolio and a steadily improving market position," he comments, conceding that the French carrier giant all but hemorrhaged staff in its post-bubble existence, going from 98,000 to 58,000 employees. Nevertheless, Rehbehn argues, Alcatel effectively righted itself in the last few years. "Past acquisitions of Newbridge Networks and TiMetra have yielded new momentum in the IP networking that helps complement a strong triple play story with IPTV and DSL access," he points out. "Beyond triple play, the company's strong IMS/NGN and optical pushes helped round out a solid portfolio. Yet the company lacked a leading professional services solution and -- beyond successes in the U.S. access market with a significant DSL presence -- is largely absent in the American market."

Enter Lucent, which Rehbehn says all but abandoned its pre-bubble strategy of bringing new purpose-built hardware solutions to market. "To compensate, the company's message shifted to delivery of professional and managed services via the Lucent Worldwide Services [LWS] organization and a suite of products aimed at the emerging opportunity for 'blended services' promised by IP Multimedia Subsystems...technology," he points out. "But despite strengths in CDMA2000, professional services and IMS, Lucent lacked the scale required to generate long-term confidence of operators around the world." Rehbehn sees the proposed merger as anything but a slam dunk, however -- particularly in light of ongoing labor turmoil in Alcatel's home base of France.

"Cultural and scale challenges make the proposed merger a dicey one -- demanding excellence in execution and political skill to navigate the treacherous waters of French labor strife," he points out. Nor is the merger free from overlap, says Rehbehn, who contrasts it in this regard with Ericsson's acquisition of Marconi. "[W]hile Ericsson acquired elements of Marconi to help fill a surgical gap in Ericsson's portfolio, this merger raises the specter of significant product overlap: Very different approaches to UMTS, overlapped optical lines and the Riverstone acquisition that now appears to be redundant with Alcatel's IP portfolio even before it closes."

And then there's the problem of entrenchment. "Once service providers deploy carrier-grade products, it is hard to remove them -- risking the benefits on [Alcatel and Lucent's] future product development synergies. Yet even if the company initially keeps them all, some choices must inevitably get made: Which products get the investment for new features? Which products will atrophy -- even though they remain on the roadmap? Competitors will seize the opportunity in the time leading up to the closure of the deal to remind the market of these dangers." -Stephen Swoyer