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Technology Stocks : Alcatel (ALA) and France -- Ignore unavailable to you. Want to Upgrade?

To: Steve Fancy who wrote (3416)	6/6/2001 6:50:04 PM
From: Steve Fancy	Read Replies (3) \| Respond to of 3891

ANALYSIS-Alcatel under pressure to gain market share Reuters, 06/06/2001 14:11 By Catherine Bremer PARIS, June 6 (Reuters) - As the dust settles on failed merger talks between Alcatel and rival Lucent, investors say the French telecoms equipment group still needs to make acquisitions to build up global muscle and improve profitability. Already a giant in Europe, Alcatel says it is in no hurry to find an alternative U.S. partner and will instead focus on its three main divisions -- networking, optics and space -- and stop making handsets or providing telecom services to companies. Yet the group still needs to gain U.S. market share, particularly in terrestrial high-speed optical networks and wireless infrastructure, to weather the current market slowdown unscathed and with its margins intact. "Unless it makes some decent-sized acquisitions, Alcatel will stay a minor player in the United States and will be hard pushed to gain market share from rivals," said Emmanuel Chapuis, a fund manager at Credit Mutuel Finance in Paris. "With a dominant market share in more of its businesses, Alcatel could count on operating margins of around 10 percent, a good level for telecoms equipment makers. Size makes you much less susceptible to price pressures in hard times," he said. Bankers close to Alcatel said on Wednesday the group is still in the race to buy Lucent's fibre-optics unit, which they expect will sell at the low end of a $4.0-$8.0 billion range. Alcatel has declined comment on its bid for the unit, which Italy's Pirelli (MILAN:PIRI) is also seen interested in. Lucent is preparing to shortlist bidders by end-June, the sources said. Alcatel has bid about $5 billion for Lucent's (NYSE:LU) fibre optics division. Integrating the unit would triple Alcatel's fibre optics business and lift it to second place in the global pecking order behind U.S. Corning (NYSE:GLW). "Lucent's fibre optics unit would be a nice buy, but it's a pretty small unit. The deal wouldn't be far-reaching enough to satisfy most investors," said an analyst in Paris. ACQUISITION SEEN INEVITABLE Unlike Nokia, which ranks first or second in practically all its markets, Alcatel is only truly dominant in two -- submarine networks and high-speed ADSL (asymmetric digital subscriber line) links between local customers and networks -- which together make up a quarter of its turnover. "The only way to get to double-digit margins is to be a leader in at least half your businesses. To get there, Alcatel must make acquisitions in networking and optics. What else can it do to make itself attractive to investors?" said a second analyst. Alcatel's networking division, which includes switches and ADSL equipment, accounts for some 40 percent of sales. The company last year bolstered its long-haul networking and switching business by buying Canada's Newbridge Networks. Optics, which includes submarine and terrestrial high-speed cables, account for 25 percent of sales but is a key earnings driver and promises to be its fastest growing future segment. But Alcatel still needs to boost U.S. sales in networking and optics. It ranks third behind Nortel Networks (TSE:NT) (NYSE:NT) and Lucent worldwide in networking and comes second behind Nortel in optics. In wireless networks, it ranks a laggardly fifth, lacking equipment for the the U.S. CDMA mobile standard to complement the European GSM standard. Dubbed a "high-risk, high-reward" operation, buying Lucent outright would have created a giant to challenge Nortel, boosting Alcatel's share in the switching market to 45 percent from 20 and its share in optical networks to 35 percent from 20. Analysts pegged possible annual cost savings from integrating Lucent as high as $4 billion within two years. "The talks with Lucent came about, not because Alcatel lacks critical mass, but because you need more than that, you need to really dominate in today's climate to hold onto market share and get economies of scale," said the Paris-based analyst. LUCENT STILL SEEN A GOOD MATCH With other potential spouses few and far between -- Nortel has yet to show an interest in Alcatel -- traders speculated this week that overall merger talks with loss-making Lucent could reopen. "This deal was so high profile. Both of them got slapped in the face yet nothing has changed. The pressure is still on," one banker said of the $23 billion merger discussed last month. "Lucent's CEO was heavily criticised for getting in the way. I certainly wouldn't rule out that they might talk again." Talks broke down at the eleventh hour due to differences over the board weighting and the balance of management control. Some say Alcatel should get its house in order before embarking on an ambitious mega-merger. While not shackled with Lucent's financial woes, Alcatel shocked with a profit warning last week, predicting a three billion euro second-quarter loss due to writedowns, inventory depreciation and restructuring. Analysts predict a one billion euro loss in 2001. They see operating margins coming in around five percent, better than many of its peers but down from 7.2 percent in 1999 and a far cry from the 9.4 percent Alcatel managed a decade ago. "What's hard is weighing up the benefit to margins of gaining critical mass from a takeover and the risks that would be involved with a large-scale acquisition," said Chapuis. (Additional reporting by Sophy Tonder) Copyright 2001, Reuters News Service