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THE WAGONS CIRCLE THALES

28 Mar 06. The announcement that Lucent and Alcatel are back in merger talks has re-opened the bidding battle for Thales by EADS. No sooner had the deal been announced than EADS, Alcatel and Thales all made statements with regard to the future of Thales. But, in true French style, the final solution will be French as required by the current policy on defence products and technology

The FT reported that if all goes to plan, Serge Tchuruk will step down as chief executive of Alcatel in June and move upstairs as chairman with a mighty bang. For the veteran boss of the French telecoms equipment group is in the throes of clinching two potentially transformational deals.

First, the revival of his merger with Lucent that collapsed so embarrassingly five years ago. The chances of success are much greater this time, despite the risks of deal-breaking objections from the US government on security grounds.

Both Alcatel and Lucent are in far better shape and the combination would create the world leader in fixed-line networks and the number two in mobile networks. It would resolve Mr Tchuruk’s succession with the appointment of Lucent’s Patricia Russo as Alcatel’s new CEO. The Lucent deal, some have concluded, suggests Mr Tchuruk has abandoned his designs to boost his stake in Thales to become the French defence and civil electronics group’s core industrial shareholder.

The opposite seems to be the case.

Negotiations are continuing for a deal whereby Alcatel would swap its satellite business, jointly held with Italy’s Finmeccanica, for a 25-30 per cent stake in Thales, slightly lower than the French government’s 31 per cent stake in the company.

The Italians appear happy and, better still, rival EADS is also considering bringing in its Astrium satellite unit. The Franco-German aerospace group has not abandoned its longer-term strategy of trying to absorb some of Thales’ defence activities. In the meantime, it seems to have sensibly come round to the idea that consolidating the European satellite business is best for everybody.

This would also give the new Alcatel-Lucent a useful poison pill to discourage potential marauders. With its core stake in Thales, Paris would be entitled to block any hostile approach on defence grounds – all the more useful if, as expected, Lucent hives off its sensitive Bell Labs to secure Washington’s approval for the Alcatel merger.

One problem is the security issues surrounding Bell Labs should the new deal succeed. The FT reported that Bell Labs, the technology and communications research unit owned by Lucent, could be separated and placed under the control of a new board if the US company agrees to merge with France’s Alcatel.
According to people familiar with the matter, the two telecoms equipment makers have been seeking to work out details of a structure for Bell Labs that would satisfy a US regulatory review by the Committee on Foreign Investment in the United States, the inter-agency panel that vets foreign takeovers on national security grounds.

One solution that appeared to be gaining traction as Alcatel and Lucent entered the final round of negotiations was a separation of the Bell Labs unit, which has a close relationship with the US military, under the control of a board composed of US political and business leaders.

Another option involves separating only Bell Labs’s classified research business, which carries out work for US government agencies and the defence department.

By voluntarily suggesting a structure for Bell Labs, the two companies are hoping to enter what is expected to be a tough review on better terms with Washington.

Pre-emptive attempts to address concerns that might be voiced by CFIUS are not uncommon, and often help smooth the path to approval. Alcatel and Lucent are expected to argue that a merger would preserve Bell Labs, an American icon, in the face of competitive threats from China.

The future of Bell Labs is

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