As French telecom-equipment giant Alcatel and U.S.-based Lucent prepare for Sept. 7 shareholder votes on a planned merger of the companies, critics are warning the merger could be a bad deal for investors.
) is overpaying for Lucent (
), which suffered a 79% third-quarter earnings drop and a roughly 20% slump in its share price since the merger plan was announced on Apr. 2 (see BusinessWeek.com, 4/3/06,
'Alcatel and Lucent: A Global Logic'
While the agreement values Alcatel shares at about five times those of Lucent, the ratio should be closer to seven to one, Proxinvest chief Pierre-Henri Leroy contends. Leroy also faults the deal on corporate governance grounds, including overly generous job protections for Alcatel Chairman and Chief Executive Serge Tchuruk, who would become the combined companies' non-executive chairman. 'In too many ways, this deal is just too expensive for Alcatel shareholders,' Leroy says.
On the other side of the Atlantic, some Lucent shareholders are pursuing a class-action lawsuit contending just the opposite"”that they will get too little from the merger. A New Jersey state court is set to rule Sept. 6 on their request for an injunction to postpone a Lucent shareholder vote the following day.
Despite the 11th-hour fireworks, the deal still looks like it will be approved by the required two-thirds of Alcatel's shareholders and 50% of Lucent's. The big French investment funds advised by Proxinvest, including the asset-management divisions of banks CrÃ©dit Agricole and SociÃ©tÃ© GÃ©nÃ©rale, account for less than 15% of Alcatel shareholdings.
As recently as a few days ago, several big funds were considering a 'no' vote, primarily because of concerns over corporate governance, says a Paris market insider who has talked with the funds' managers. But most now are leaning toward giving the deal a green light despite Proxinvest's opposition, he says.
Alcatel and Lucent are mounting a vigorous defense of the merger, under which Lucent CEO Patricia Russo would run the combined companies while Tchuruk would be non-executive chairman. 'The telecoms sector is undergoing a rapid and profound transformation. We are merging to become the leader,' Tchuruk said in an interview on Aug. 31 in the Paris business daily Les Echos. Lucent representatives also have spoken out in support of the deal, and have said that the investors' lawsuit is 'without merit.'
The merger has won the endorsement of Maryland-based Institutional Shareholder Services, the world's biggest corporate governance and proxy-voting adviser. While Lucent's recent stumbles could have some short-term effect, they do not affect 'either the projected cost and tax synergies or the strategic rationale for the merger,' the group said in a note to its clients.