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Bon chance getting this deal done, Alcatel-Lucent

August 26, 2009

It beggars belief that humbled telecom equipment supplier Alcatel-Lucent could be scooped up by a Chinese rival with nothing better to do. Huawei or ZTE seem credible candidates. The question is, why would they ever bother?

PLA soldiers perform during a rehearsal of a musical drama in Beijing

That didn’t stop shares of Alcatel-Lucent from rocketing up as much as 21 percent on Wednesday on rumors of an unnamed suitor. Momentum was helped by a rating upgrade on the depressed stock by French broker Natixis. The shares later settled back somewhat to trade at 2.75 euros, up 12 percent on the day in Paris.

Why would a Franco-American company that is widely considered a failed example of industry consolidation be doing the same thing over again, but with the added complexity of China in the mix?

The typical explanation for cross-border mergers involving Chinese buyers is to acquire Western branding for goods produced at lower cost in China. But didn’t BenQ’s 2006 acquisition of Siemens mobile handset business spell the end of that kind of easy cross-border logic?

To begin with Chinese companies seem to be having little problem making inroads with Western phone carriers on their own. Low-cost trumps national identity in purchasing decisions these days, even with former national heroes like Alcatel or Lucent.

Furthermore, cross-border mergers in the telecoms industry have a way of tripping all sorts of national security alarms. It was only 18 months ago that a far smaller deal was blocked by U.S. political opposition when Huawei tried to buy a stake in struggling network gear maker 3Com.

Only with a struggle did IBM manage to push through the sale of the IBM PC division to Lenovo three years ago. No doubt Alcatel-Lucent’s government contracts dwarf those of those earlier deals. Of course, playing the security card is usually just an excuse for national chauvinists to derail a deal they don’t like for local reasons.

And just to further complicate the issue, Alcatel-Lucent itself has one of the longest operating histories of any Western company in China, through a joint venture called Shanghai Bell formed in 1984, one of the earliest foreign investment ventures of the modern era. That’s the context to Alcatel-Lucent saying it had signed a big contract with China Telecom to supply backbone networks across ten provinces, which no doubt contributed to the stock’s rise.

More than likely, someone looking for a quick exit from the stock is spreading a useful rumor. The trick involves finding a player with deep pockets but who is unlikely to immediately deny the speculation. It works best in the thin trading of late summer markets. A few years ago, Google was somehow always the likely suitor. Chinese network equipment suppliers have to fit the bill these days, now that Google is seen as less omnivorous.

This merger speculation is more than a bit silly, given the dearth of actual deals getting done these days. The rare exceptions are Oracle-Sun, which is closing in on final regulatory approvals. And Bharti Airtel-MTN Group are looking more likely to reach a deal in coming weeks .

One London investment banker said this speculation highlights the optimism carrying stock markets along these days. I’d say the opposite. It’s just another measure of the market’s desperation as it runs out of ideas to rally around.

(Photo: Reuters/Kevin Zhao)

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