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The following is a transcript of the press and investor conference call
conducted on April 2, 2006 by Lucent Technologies Inc. and Alcatel relating to
the proposed merger of Lucent Technologies Inc. and Alcatel:
OPERATOR
Ladies and gentlemen, thank you for standing by. Welcome to the Alcatel-Lucent
conference call. At this time all participants are in a listen-only mode. Later
we will conduct a question and answer session; instructions will be given at
that time. (OPERATOR INSTRUCTIONS) As a reminder this conference is being
recorded and webcasted.
I would now like to turn the conference over to our hosts, Serge Tchuruk and Pat
Russo. Please go ahead.
PASCAL BANTEGNIE - ALCATEL-IR
Thank you. This is Pascal Bantegnie speaking. Good morning, good afternoon and
good evening to everyone. Thank you for joining the call on such short notice.
Today, Alcatel and Lucent Technologies announced that they have entered into a
definitive merger agreement to create the first fully global communications
solutions provider.
I am very pleased to have with me today to discuss the merger Serge Tchuruk,
Alcatel's Chairman and CEO, and Patricia Russo, Lucent Technologies' Chairman
and CEO. We will begin with Serge and Patricia providing an overview of the
merger and then we will open the call for your questions.
If anyone has not yet seen a copy of the announcement the press release is
available on both the Alcatel and Lucent websites. Before we begin let me remind
everyone that this conference call is open to both the media and financial
analysts and we are also providing a simultaneous webcast of the call for the
public. The replay of the call will be available on both Companies' websites
today. The CDF version of the slides that we are video streaming along with this
call has also been posted to both websites for your reference. I also want to
remind you that today's remarks contain statements regarding the proposed
transaction between Alcatel and Lucent Technologies and that these statements
considered forward-looking statements within the meaning of the U.S. Private
Securities Litigation Reform Act of 1995. We can offer no guarantee of future
performances or of the expected timetable for completion of this transaction.
For a complete list and description of risk and uncertainties I would like to
refer you to the Safe Harbor statement at the beginning of the slide
presentation and all publicly filed documents from both companies with the SEC.
Now at this point I would like to turn over the call to Serge, who will start
the presentation, and he will then hand over to Patricia Russo.
SERGE TCHURUK - ALCATEL- CHAIRMAN, CEO
Good afternoon or good morning to some of you. Pat, can you hear me all right?
PAT RUSSO - LUCENT TECHNOLOGIES - CHAIRMAN, CEO
Yes, I can.
SERGE TCHURUK - ALCATEL- CHAIRMAN, CEO
Okay. Very good. I am frankly very proud and I am sure Pat is to today announce
what is likely to be a major event in our industry. Sometime a few hours ago or
not so long ago actually the boards of the two companies have unanimously
approved a merger
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between our two companies. To form what is not less than the world's leading
communications solutions provider. So I would like to in my opening remarks to
briefly try to give my answers to three questions. Why merge, why now, and why
Alcatel and Lucent.
Let me try on the first one, why emerge? There are today two essential keys for
success in today's very competitive market. The first key to be amongst the best
in the capability to innovate in products but not only in products also
solutions and service. The second key to be amongst the best in the lowest cost,
at the lowest cost player; in other words the market is so competitive that even
if you have the first key and you don't have the second key, you cannot open the
door. To get those keys working obviously scale and size can help and a
combination of two very large players which individually have already gone a
long way in meeting those two criteria can be a formidable winner.
Now, the second question is, why now. Now seems to be the optimal time because
this combination gives both companies distinct time to market advantage in a
market that is changing significantly. This is the first tier 1 combination in
equipment suppliers which gives us a great start. Scale and speed to market have
become even more critical as the communications landscape changes rapidly due to
competition, consolidation and complexity, three industry forces that now make
this combination a logical course for both companies.
The third question and next slide if I may, why Alcatel and Lucent? To be frank
that is not a new idea at least for me. I will simply remind that five years ago
we went a very long way to get this done and the discussion broke out in the
last minutes I would say, so I don't know if Rene Chard by any chance is
listening to the call, but if he does I would remind him of this time and send
him my warmest regards. So why Alcatel and Lucent?
Because you know this is really creating the first true global communications
solutions provider; very deep customer relationships as you can see on this
slide with nearly every major service provider throughout the world, a lot of
industry-leading R&D platforms, complete ability to offer integrated end-to-end
solutions and not so many players today can offer end-to-end solutions. Alcatel
and Lucent can both and obviously a combination can do more. A leader in
converged networks. I would say that even if we come from two say continents, I
always felt that Alcatel and Lucent shared a common vision and innovation
culture which should enable successful execution. In other words our people
understand each other very well, actually, when they talk to each other.
The third thing the geographic fit is absolutely exceptional. I am sure Pat will
talk about that in more detail, but you know it is roughly one-third u.s. and
Canada, one-third Europe and one-third of the rest of the world including Asia.
One could hardly dream any better.
The fourth thing it so happens and that is not again a discovery, that bringing
together the two companies can achieve significant synergies and should
therefore contribute and enhance the financial position of the two companies. We
have estimated that something like EUR1.4 billion in annual pretax cost
synergies within three years can be achieved with a substantial majority
expected to be achieved in the first two years post closing. So NPV at about 10
to 12 billion actually.
The combined revenues of the two companies are going to be about 21 billion or
25 billion of US$ with cash in around 10 billion. The combination will yield the
EPS accretive in the first year post-closing with synergies excluding
restructuring charges and amortization of intangible assets. This sounds to me
as a strategic feat is exceptional -- the right time, the right solution, the
right Company, and we are convinced it goes a long way enhancing shareholder
value.
Going now to the next slide a few short words about what the transaction is.
First of all the combined market gap of the two companies amount to
approximately EUR30 billion or 36 billion US$. The transaction will be a stock
for stock merger which is going to be structured as a tax-free exchange of
Alcatel ADSs for Lucent shares. Upon completion of the merger Alcatel
shareholders will own approximately 60% of the combined Company and Lucent
shareholders will own approximately 40% of the combined Company which reflects
difference in the capitalization of the company. In legal terms this is
structured as a reverse triangular merger after which Lucent will become a
subsidiary of Alcatel and Lucent shareowners will receive a tax-free
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exchange of Alcatel ADS or ADSs for Lucent shares. By the way these structures
are common in mergers of this size and most mergers involving U.S. public
companies are done this way. The merger will have to go through the regulatory
approval process and we expect the closing should take place between 6 and 12
months from now. Regulatory approvals are required from the European Union
Commission, the U.S. A. Anti-Trust Authorities and the Exxon-Florio Act.
Now some additional words on what the Company is going to look like. The new
Company given the process which we are adopting is going to be incorporated in
France with executive offices in Paris. The new Company name will be determined
at a later date. The North American operations will be based in New Jersey where
Global Bell Labs are headquartered and will remain headquartered. The leadership
will be nonexecutive chairman myself; and CEO Patricia Russo, will be based in
Paris. There is going to be an international board including 14 members. Six
will be Alcatel's current directors, some of Alcatel's current directors I
should say including myself, six will be some of Lucent's current directors
including Pat Russo and two new independent European directors will be mutually
agreed upon. We are really trying to leverage the best of the two companies.
Now some additional words if I may on the next slide just to complete the broad
picture. If I look at adding up some of the numbers, I am frankly quite
impressed myself -- I should not say it -- by what comes out of it. We are
without any doubt and much beyond anyone else the number one worldwide in
wireline at a time where its market picks up again due to IPT and many other
things, network transformations. We are the number two in worldwide mobility and
we are also the number two in worldwide services. If I look at wireline
everybody knows our combined strength in DSL which reached close to 40% market
share. We are big players in optics and we are by far the number one in optics,
number one in multiservice one; number three in IPS routing and they like. The
wireless, pout will talk routing and the like. The wireless, Pat will talk more
about it, but overall our marketshare will amount with all standards to
something around 18% and we are going to be the number two in this market with
a lot of strength. CDMA strength of Lucent, our big strength in the emerging
world and we can talk more about this. Services, our sales are going to be
4.1 or 5 billion US$ in combined revenues across the number of applications.
So the picture is really I believe quite compelling; our `05 revenues amount to
EUR25 billion, 25 billion US$. We are present in nearly any major carrier
throughout the world. We are a leader in IPTV, NGN IMS and 3G spectrum, and we
are in a unique position in service integration. One word about our customers,
who our customers are, I am not going to go through the list, but as I said
there's practically no customer, large or small, not being reached by either
Alcatel or Lucent.
Now for our customers, what does this thing? I believe the benefits for our
customers are quite compelling. What do our customers want? They want us to be
both global and local, which seems a bit paradoxical but that is the way things
are. As to being global we have a comprehensive R&D portfolio which leverages,
among other things, Bell Labs excellence with 26,000 R&D engineers and 25,000
active patents. We are a leading end-to-end communications solutions integrator.
We are a leader in major areas defining the next generation network and Pat will
certainly say much more about this. We are a local partner in every region and
there's not one single country in the world where there is not a significant
presence today of either us or Lucent. And obviously this is going to be a
long-term strategic partnership.
Now in conclusion, I believe that the combination of Alcatel and Lucent will
provide the right answers to the key issues. We are the answers to the ongoing
consolidation of the global service providers. We are the answer to the
increasing network complexity as convergence requires breadth of products and
depth of services expertise. We are the answer for the service providers
requiring a long-term reliable partner as major network transformation just
begins. We are the answer to the demanding needs for large R&D investment
required to maintain leadership for us and our customers. So in a nutshell,
scale and scope will further enhance our competitiveness and I am very convinced
about that. So I would like to give the floor to Pat. Pat?
PAT RUSSO - LUCENT TECHNOLOGIES - CHAIRMAN, CEO
Thank you very much. Good morning, good afternoon and good evening to everyone.
This is certainly a very exciting day for all of us at Lucent Technologies with
our partners at Alcatel. This is my view and Serge has said it very well, a
truly compelling
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combination at a time in the industry where consolidation, competition and
complexity are driving a set of needs that this combined company will be better
able to meet, we believe, than any of our competitors.
Let me proceed here and talk a little bit about the two companies with a common
vision. We share -- I think it is important because as Serge said, we know each
other well. We have worked together and side-by-side and also competitively in
the industry. But dating back five years these are two companies who know each
other fairly well and we share a common vision of where networks are going and
what the expertise is that is required to get them there. We share a common and
deep understanding of what our customers require and we both share a combined
culture of technical excellence and a passion for innovation. And I look forward
to leveraging that passion into extending our leadership in the global market.
We bring together a pace and breadth and depth of talent it is unparalleled in
the industry and as Serge noted we have geographic, a portfolio and a customer
fit that is really quite complementary. We have a shared vision and a uniquely
complementary fit to the combination of these companies.
Moving on, just to punctuate a point that Serge made about the leadership that
we have in the key and relevant areas that are important to how networks will
evolve with respect to the next generation of technologies, and the ability to
deliver new converged services on behalf of our customers. If you look at what
is happening in the market, clearly the areas that you see on the next chart
point to the areas that we believe are most relevant to win in the arena of next
generation networks. And certainly the combination of our companies provides
leadership in each of these areas. In the fixed and mobile broadband access
area, number one in DSL, number two overall in mobility. I would point out that
our combined CMA and UMTS businesses would make us number one in the third
generation spectrum technology base which as you know is the fastest-growing
mobility segment.
In optics, microwave, clear leadership in the traditional transport
technologies, but also very well positioned to help our customers integrate new
Ethernet solutions and number one in microwave thanks to Alcatel's
industry-leading point-to-point solutions, which are really very well-suited for
quick and economic deployments of new legs of the network. In the converged
core, and the converged edge area we would be both number one in both
multiservice wide area networks as well as IMS. And in the integration and
services area we have the capabilities as you can see on the chart, across many
sets of skills that really come together to create for us the number one
position in network transformations services. So the real point here is that in
the areas that we believe are relevant to where the growth will be the combined
Company will be either number one or number two in each of these areas.
Moving on I talked about the strong position that the combined companies will
have in mobility. We will be the leader in terms of innovation, expertise,
deployment services and network migration as well as pure volume. Lucent as you
may know is the global leader in 3G CDMA -- with a 48% global market share and
strong relations around the world. Alcatel is very well positioned for 3G UMTS
migration, strong presence with its GSM base and in a number of the growing
markets around the world. So both companies will have strong positions in large
footprints in 2G and 3G networks, and we look forward to leveraging those as
third generation technologies take hold around the world.
Additionally both companies would be very well positioned for 3G services in
China, including relationships with China Unicom and China Mobile, and we are
both working with carriers in China as they prepare for the 3G license and
implementation of those technologies. Lastly, a strong footprint in IMS and
Access.
Moving on, I think there's no question that another clear differentiator for the
combined companies is our strength in what is known as the triple play of voice,
video and data. Together we will be the most experienced company in terms of its
capability with more than 40 projects underway around the world including 20
commercial networks. We see the opportunity with our combined capabilities to
really leverage and end-to-end service capability by linking what is happening
in the Access network into the next generation IMS core and enabling exciting
and creative new services for our customers.
5
We also enjoy together a very wide ecosystem of partners as a result of the
relationships that both Lucent and Alcatel have established in the industry. I
spoke to -- moving to the next chart -- I spoke to our capability in the
services and support arena there is no question in our mind that as the
complexity of these networks continues to intensify our customers' needs for
integration, migration, professional services, consulting services and that kind
of help is growing. We bring together a deep and broad capability here and see
from this space a significant opportunity to be able to grow. As Serge noted the
combined services business for EUR4 billion or 5 billion U.S. dollars. They
really span not only the traditional service arena which has been and will
continue to be important, but also new service areas, consulting and
professional services, as well as hosted applications and services associated
with those, which will allow for us to leverage our next generation in IMS
positions. And lastly, we've developed a distinct multivendor capability that
will enable us to better deliver complex end-to-end support for our customers.
The last area I'll focus on is to really talk about a leading position in IMS
and the network transformation associated with that. As Serge noted, our
industry is at the beginning of a major technology transformation through an all
IT network characterized as IP multimedia subsystems or IMS. The combined
companies bring to this proposition a set of capabilities in the wireline, the
mobile and the enterprise arena that we believe give us greatest stability to
integrate and leverage our technical expertise, our technologies, our portfolios
to really help our customers create the next generation of converged lifestyle,
personalized services that we believe will help them grow their business. So I
think this is an area where, as we go forward, the strength of both companies
against an industry that is at the beginning of a major transformation bodes
very well for our position in the market, as well as our ability to grow.
Moving on to cover a little bit about the geographic balance and Serge noted
this, this is truly a global company. If you look at the geographic balance it
could not be more perfect, quite frankly, when you look at where the spending is
in the industry. In 2005 about half of Alcatel's business came from Europe,
about 66% of Lucent's business came from North America. If you look at the
combined companies and the calendar year 2005 revenues, what you see is about
one-third, one-third and one-third across North America, Europe and then
one-third split between the Asia Pacific regions, the Middle East and Africa,
and the Caribbean and Latin America regions. So a compelling geographic balance,
and I would argue the best geographic balance in the industry.
Moving on, the combined companies have clearly an industry-leading R&D
capability. When you look at the number of developers and engineers we have
around the world combined, we would be 26,000 plus strong with respect to the
engineering resources and the collective brainpower of those people. From a
patent standpoint, we would have 25,000 active patents in our patent portfolio.
And combined an R&D investment capacity of EUR2.4 billion or 2.9 billion of R&D.
So just a tremendous wealth of talent, assets and technical depth that will be
at the foundation of this combined Company.
I know there has been some speculation about how to handle any work that is done
for the u.s. government or for the French government and I would say that we
intend to form a separate U.S., independent U.S. subsidiary. Certain contracts
with the U.S. government agencies. This subsidiary would be separately managed
by a board which will be composed ofthree U.S. citizens which will be acceptable
to the government. This is a structure that is routinely used to protect certain
government programs in the course of mergers that involve non U.S. parties. And
with regard to Thales, the combined company will remain the industrial partner
of Thales and a key stakeholder alongside the French state, directors to the
Thales board who are nominated by the combined company would be European Union
citizens. And Serge Tchuruk or a French director or a French corporate executive
of the combined Company would be the principal liaison. So we have prepared
structurally and from an oversight standpoint, we have cared for the unique
needs of any work that is being done that is sensitive for either the U.S. or
the French government.
Let me say a few words about the compelling nature of the cost synergies. As we
said earlier, we would expect to achieve about EUR1.4 billion or 1.7 billion
U.S. dollars in annual pretax cost synergies. We would expect to achieve these
within three years with a substantial majority achieved in the first two years.
The net present value of these cost synergies is expected to be EUR10 billion
or 12 billion US. We have through the teams that have worked together, mutually
identified the synergy opportunities and would expect to capture them by the
integration and rationalization across a number of areas cited on this chart,
corporate
6
functions, our supply chain and procurement practices, any overlap with respect
to sales and marketing and the light. As well as, we'd also expect to find some
synergies with respect to common platforms, consolidating facilities and those
sorts of things.
The next chart really tries to layout the anticipated timing of these synergies
and as I noted earlier, we would expect a significant majority of those to be
achieved in the first two years. A lot of work has already been done, there is
clearly a lot more work to be done as integration planning proceeds, but this is
a compelling set of synergies that are tangible and have been mutually
identified and agreed to between the companies.
We have not included in the synergies that we've noted any synergies resulting
from potential revenue upside and do believe, however, that there are
opportunities as a result of cross selling that could be done in certain product
areas as noted on this chart. Our portfolios in many ways are complementary and
so we see opportunities to incorporate one another's products into a total
solution. And as well there is complementarity geographically and from a
customer standpoint so we would expect to capture some pull-through revenue
synergies as a result of that. But as I have said, those are not factored into
the synergy analysis that has been presented here, but you can rest assured we
will be aggressively going after those.
A few more words about restructuring. We would expect as a result of the work
that has been done that we would see a reduction in the range of about 10% of
our worldwide work force. We are very sensitive to obviously, the concerns of
the employees of both companies. We expect to take a fair and balanced approach
as we manage our way through this. We would expect that we would experience
EUR1.4 billion or 1.7 million US dollars in new cash restructuring charges
associated with the restructuring that we anticipate being done. And again, as I
said, we would expect a substantial majority of the restructuring to be
completed within the first 24 months after closing.
Let me say a few words now about Lucent's pension plans and retiree health care
as this often generates questions. First of all in the area of pensions Lucent's
pension plans remain very well funded under the current U.S. government
guidelines. The Company has not been required to make contributions to these
plans since their inception in 1996, and currently does not expect to make any
contributions through September of 2007. As you can see the fair value of the
plans assets is about 34 billion US dollars and the benefit obligation is at
approximately 31 billion.
I noted that we don't expect to make any contributions through 2007. We also
believe it is unlikely that any required contributions would have to be made
before 2010 that would have any material impact on our liquidity. With respect
to retiree health care, we do provide benefits for about 182,000 retirees and
their dependents. We have been working with our union partners to seek some
legislative changes that would increase our flexibility to use excess pension
assets to help fund retiree health care. We take the interest and needs of our
retirees very seriously, and we have worked hard to find the right balance
between supporting those needs and what the Company has been able to afford.
Let me move along to the next chart which speaks to the enhanced financial
position of the combined company. As you can see, the combined company will have
a strong balance sheet and income statement. As of December 31, 2005 the
combined companies had EUR9 billion in cash and 11 billion US dollars, which
puts the combined Company in a net cash position of about EUR1 billion. As Serge
noted, the combined revenues of the Company will be EUR21 billion, 25 billion
US$ with a combined income of EUR2 billion in calendar 2005. The Company's
overall debt profile will continue to be relatively long dated with more than
60% of its debt maturing on or after 2010. At the same time, the combined
Company will also have substantial deferred tax assets.
So in summary and I know we've shared an awful lot with you but just to recap
what Serge said, we are very excited about this combination. We see it as an
opportunity to create clear competitive advantage in the marketplace. There is
compelling strategic rationale for this merger. The combination of Alcatel and
Lucent will create the first truly global communications solutions provider. It
is a clear leader in convergence. We have a shared vision and a culture of
innovation that we believe will help ease our transition and benefit both our
new and existing customer. And lastly, this provides us a tremendous opportunity
to achieve significant financial synergies, enhance our financial position and
create significant shareowner value. So the bottom line is we
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believe it is the right time, it is the right combination, and the right set of
solutions. Okay, so with that I will turn it back to Pascal to moderate
questions.
PASCAL BANTEGNIE - ALCATEL-IR
Thank you, Patricia. Stacey, if you don't mind to start the Q&A session right
now, please.
QUESTIONS AND ANSWERS
OPERATOR
(OPERATOR INSTRUCTIONS) Jeffrey Schlesinger, UBS.
JEFFREY SCHLESINGER - UBS - ANALYST
Yes. Thank you. Just a couple of financial questions and then more of a
philosophical question on how you manage this transition. You mentioned the view
that the deal would be accretive in the first year afterwards excluding the
restructuring charges and amortization of intangibles. What do you expect the
increase in the amortization of intangibles to be as a result of this deal, if
any at all? And if you can also give us a sense are any of the convertibles that
Lucent has today forced to convert as part of this? And is that increase
included in the share count assumption that you've given as part of the
exchange? And lastly on the financial side, on the cost synergies you gave us
good sense on the 1.4 billion in the different areas. Could you give us a sense
of how that would split down between cost of sales, SG&A and R&D? And then
lastly on the more philosophical question how do you manage -- after two
companies that have gone through significant restructuring over the last several
years -- how do you manage the morale going into another major downsizing? As
well as handle disruption and focus for the Company, obviously in what is still
going to be a very competitive environment, despite obviously this added
consolidation? Thank you.
PAT RUSSO - LUCENT TECHNOLOGIES - CHAIRMAN, CEO
Who wants to start? Jean-Pascal or John Kritzmacher, both of our CFOs are with
us. Do either one of you want to take the initial set of questions with respect
to the restructuring charges?
JEAN-PASCAL BEAUFRET - ALCATEL- CFO
Just commenting on the first question about the accretion power of the
transaction. We let you guys calculate all the accretion powers. We are saying
today that we have 1.4 billion cost synergies on year three in this transaction
and all that will be factored into the current model and the market model of
both companies. John, would you like to take the question about the convertible
and the earnings per share and the fully diluted model we used?
JOHN KRITZMACHER - LUCENT TECHNOLOGIES - CFO
With regard to the conversion features of the convertible debt that we have in
the marketplace there are no triggers that would be affected by the combination
of the two companies. So our conversion would be consistent with the practices
that we have followed in reporting our results over the past several quarters.
8
With regard to the question related to the amortization of intangibles, back to
Jean-Pascal's comments, it is still a bit premature for us to provide an
estimate of what those amounts might be, we still have quite a bit of work to do
to apply purchase accounting to the transaction. We will go through that
exercise and be able to report on that some time down the road.
PAT RUSSO - LUCENT TECHNOLOGIES - CHAIRMAN, CEO
Did we get all of the financial questions? Let me take a crack and maybe Serge
has some comments as well to your more philosophical question. Just a couple of
points I would make. I think obviously both companies, the people of both
companies, have demonstrated over the past several years tremendous resolve,
capacity, resiliency to manage through change. And I think if you look at both
of our companies, degree of change and the magnitude of what we have all done is
significant. So from a people standpoint I do believe that our people are up to
the task of doing what will need to be done in order to integrate these
companies, with an eye toward the future that we create for the combined Company
and the opportunity to have a platform from which, as we go through the
integration, a real platform from which to then grow, compete and win with all
of the benefits that are associated with that.
Now having said that we are not naive about the challenges associated with the
integration planning, the combination, the rationalizations that will be
required. We clearly intend to have speed as our bias, with an eye toward very
specific and detailed integration plans. We will want to move quickly so that we
can get past and through the disruptive dimensions of this on to a level of
stability that we will be all aspiring to. So I believe our people are up to the
challenge, I believe with the right leadership, the right clarity of
responsibility and a rigorous plan, we can in fact get this done. Serge, did you
want to add anything to that?
SERGE TCHURUK - ALCATEL- CHAIRMAN, CEO
MIKECAR PLEASE START HERE
Pat, just to say that I 100% share your view. Our two companies have in the
past shown the capability to weather very difficult market conditions and do
what was needed in terms of downsizing and the like. To be frank and to my
regret having been an expert in trying to downsize and streamline I do believe
that the task of achieving what is needed is feasible, with a fair and balanced
approach to our people throughout the world. I am very confident we can do
this.
OPERATOR
Kulbinder Garcha, from Credit Suisse First Boston.
KULBINDER GARCHA - CREDIT SUISSE FIRST BOSTON - ANALYST
Yes, thank you. Just a question for Pat on the restructuring side. The 1.4
billion cost reduction that you're talking about is I think more aggressive
than even the most optimistic offorecasts. Can youjust give us a sense of how
that might split down between headcount and non headcount?Then also in terms of
actually Alcatel Lucent retaining those benefits often a significant amount of
cost savings pass back to customers in one form or another over time. How
confident can we be that Alcatel-Lucent can preserve on to those cost savings
and really drive the margins in that manner?
PAT RUSSO - LUCENT TECHNOLOGIES - CHAIRMAN, CEO
First of all, I believe as we look at the restructuring and I will ask my
colleagues to provide any additional color here, that if you look at the
breakdown of the estimated synergies, about half is related to headcount
reductions we've talked about, and the other half related to things like
leveraging our procurement practices and consolidation of operations like IT
and real estate and those sorts of things. So that is kind of a rough flavor of
how these restructuring charges break down.
Then the second part of your question?
9
KULBINDER GARCHA - CREDIT SUISSE FIRST BOSTON - ANALYST
It was just with respect to cost improvements. Whatwe see in the industry is
typically a large part, then passed back to customers as part of the simplified
or however those things tend to work. I'm just wondering what is the confidence
you can actually retain them and they will go to Alcatel or Lucent's bottom
line.
FRANK D'AMELIO - LUCENT TECHNOLOGIES - COO
From my perspective -- we have and we will continue to do this -- every year we
work significant, extensive cost reductions in your products. Clearly, in one
way, shape or form, we pass that back to our customers. We have done that; we
will continue to do that. To the extent that the efforts here assist us to do
that further, we will obviously consider that going forward.
KULBINDER GARCHA - CREDIT SUISSE FIRST BOSTON - ANALYST
Okay, thanks. Just one final follow-up. My math kind of suggests that if you're
having some sales growth, let's say not even a great deal but actually get this
$1.4 billion cost synergy, we're talking about business that should do a clean
operating margin in the midteens within two to three years. I guess my question
is, given the fragmented nature of standards, is that the kind of numbers we
should be thinking about as a long-term margin for this business?
PAT RUSSO - LUCENT TECHNOLOGIES - CHAIRMAN, CEO
Jean-Pascal, do you want to respond to that?
JEAN-PASCAL BEAUFRET - ALCATEL- CFO
It is absolutely clear that the potential of increases, the margin at an
operating level, is quite significant in those transactions. I would say that
it will be somewhere in the 10 to 20%. I will not be more specific than that.
KULBINDER GARCHA - CREDIT SUISSE FIRST BOSTON - ANALYST
Okay. Thank you,Jean-Pascal.
OPERATOR
John Anthony, Cowen & Co.
JOHN ANTHONY - COWEN & COMPANY - ANALYST
A couple quick questions. Given the history of mega consolidations within the
technology segment as a whole, what do you plan on doing differently to avoid
some of the pitfalls outside of the other acquisitions we have seen
historically that haven't worked out? Secondly, along the same lines, have you
put any sort of retention programs in place to keep key employees throughout
both organizations? Last, is there any sort of breakup fee involved in this
deal?
10
SERGE TCHURUK - ALCATEL- CHAIRMAN, CEO
I can take the first part of the question, Pat. The good thing about this
Alcatel/Lucent combination is the fact that there is not a huge overlap. I
mean, there is some overlap; otherwise, we would not have cost savings. But
there is not a huge overlap in the way the two companies are made up. In other
words, we have carefully looked at product lines, our geographic implementation
and the like, and obviously I'm not going to tell you it is very easy to
rationalize, but we have a very clear view of what and how you can do it.
Again, this is based on a thorough evaluation which we have conducted. The
numbers which we are quoting for synergies are completely based on rather
in-depth study. Now, on the rest of the question --.
PAT RUSSO - LUCENT TECHNOLOGIES - CHAIRMAN, CEO
I would add to Serge's comment about the clarity we have around the
opportunities and the fact that we do not have huge overlaps. I would just say,
I think when you think about how do you approach an integration, there are some
principles we will be adopting that I alluded to a bit earlier, right? We will
want to move with what I called prudent speed, so speed will be our bias. The
clarity around accountabilities and decision-making must be clear. The
integration plan must be detailed, rigorous and very tightly managed. And so
the combination of what we have done going into this announcement and our
philosophic thinking about how to manage the transition planning and
integration team, I believe give us a very good chance for success in this
endeavor.
From a retention standpoint, we will be taking the steps that we need to assure
that we are keeping the people that we need in the business to help us get this
done. And in terms of a breakup fee, yes, there is a breakup fee associated
with this transaction of 500 million.
JOHN ANTHONY - COWEN & Company - Analyst
A quick follow-up, is that $500 million to both sides? And then also a
question, Pat, for you specifically. How do you weigh entering into this
transaction against other choices that you had in front of you to create
optimal shareholder value for Lucent shareholders? And over what time frame did
you make that judgment?
PAT RUSSO - LUCENT TECHNOLOGIES - CHAIRMAN, CEO
Yes, it is 500 for both sides. And, you know, I think Serge said it well when
he kicked off this session. As any company, and certainly we, evaluate
strategic options, you look at what you're trying to achieve long-term and what
possible partners are available, what is the fit, both product, geographic,
cultural, technical capabilities. And just as five years ago, there were very
extensive negotiations. We believe this is absolutely the best combination for
us, given the complementarity of all of the things that we described and the
ability to create tremendous shareowner value. Next question.
OPERATOR
Stefan Formier with BSM Radio Station.
STEFAN FORMIER - BSM RADIO STATION - ANALYST
Is it possible to get a few words in French from Mr. Tchuruk
for the French radio? Mr. Tchuruk?
11
SERGE TCHURUK - ALCATEL- CHAIRMAN, CEO
[translated] Yes, but only if this is very brief since the French language is
only partially understood by the people who are listening to us.
STEFAN FORMIER - BSM RADIO STATION - ANALYST
[translated] So we'll do it very very quickly. What pushed you to restart
discussions with Lucent, Mr. Tchuruk?
SERGE TCHURUK - ALCATEL - CHAIRMAN, CEO
[translated] First, it is the fact that the two companies had the same idea at
the same time. So, this idea is not new since we already tried tofinalize the
same deal five years ago. It makes a lot of sense to merge two big companies
like Lucent and Alcatel.
Second, there are reasons driven by the market, especially the fact that our
own customers, the big operators, are consolidating themselves very quickly so
it seems logical that their suppliers, who we are, would do the same.
STEFAN FORMIER - 8SM RADIO STATION - ANALYST
[translated] We heard about resistance in the USA and even worries about Lucent
R&D. Could you tell us more?
SERGE TCHURUK - ALCATEL - CHAIRMAN, CEO
[translated] I think that Pat Russo clearly mentioned that the more sensitive
part of Bell Labs would get the necessary special protection. It will be the
same thing with our close relationship with Thales who will benefit from the
same protection in the merger of our two companies.
STEFAN FORMIER - BSM RADIO STATION - ANALYST
[translated] Can we take 30 seconds to detail this? Apparently, there is a
special board meeting about Bell Labs .....
SERGE TCHURUK - ALCATEL- CHAIRMAN, CEO
[translated] No, we are now getting into too much detail for our audience.
STEFAN FORMIER - BSM RADIO STATION - ANALYST
[translated] OK, one more question. In France, did you ever consult with the
political authorities?
SERGE TCHURUK - ALCATEL- CHAIRMAN, CEO
[translated] First, the decision was approved by both our boards who have full
authority to make decisions for the companies. As far as the political
authorities are concerned, yes, they were consulted, of course, on the
conditions they might put on this merger.
12
STEFAN FORMIER - BSM RADIO STATION - ANALYST
[translated] Did you get any resistance ... ?
SERGE TCHURUK - ALCATEL - CHAIRMAN, CEO
[translated] Thank you.
STEFAN FORMIER - BSM RADIO STATION - Analyst
[translated] Thank you Mr. Tchuruk.
OPERATOR
Tim Daubenspeck, Pacific Crest Securities.
TIM DAUBENSPECK - PACIFIC CREST SECURITIES - ANALYST
Thank you very much. Two questions. The first question, I think for a lot of
Alcatel investors would like to feel comfortable about Michael Quigley's role
going forward here. I know he has been named the COO, but the confidence level
that Mike was going to stay and be an integral part ofthis combined entity, we
would like some reassurance there.
And then the second thing, just on the two European board members. Can you just
clarify what you mean by European there and kind of are these going to be
previous Alcatel board members who come back? Can you just give us a little
more color what you might mean by the two European board members? Thank you.
MICHAEL QUIGLEY - ALCATEL- COO
Tim, let me address the first part. It is Michael Quigley here. You can be 110%
confident that I am 120% committed to this venture. Frankly, to me, it has been
the absolute right fit, as both Pat and Serge have said. We have looked very
closely at what this does, principally for our customers. Because if it does
the right thing for our customers, we are going to be successful together.
And we are absolutely convinced this is the right move for our customers. We
will bring the strength of both companies to bear on bringing end-to-end
solutions for our customers. I won't repeat what both Serge and Pat have said
about the synergies we will get, not just in cost synergies, but in our ability
to bring solutions together.
I would emphasize that I have had an opportunity to get to know both Pat Russo
and Frank D'Amelio very well over the course of our negotiations, and I very
much look forward to working with both of them. And Frank and I in particular
have quite complementary roles to play in the new organization, and I think we
look forward to being a part of the team that supports Pat and Serge as we move
forward.
SERGE TCHURUK - ALCATEL- CHAIRMAN, CEO
On the second part, what is Europe? I leave it to more qualified people to
define what is Europe. The only rationale behind this is the fact that our
Board is international in nature, so the two Boards will agree to nominate two
additional directors, jointly selected and agreed-upon, which will be European
in nationality. Europe covers Continental Europe, UK and the list of 25
countries in the EU.
13
TIM DAUBENSPECK - PACIFIC CREST SECURITIES -ANALYST
So it's more of a geographic representation, as opposed to a control issue on
the new two directors?
SERGE TCHURUK - ALCATEL - CHAIRMAN, CEO
It is a geographic representation, not [private] control.
TIM DAUBENSPECK - PACIFIC CREST SECURITIES -ANALYST
Thank you very much.
OPERATOR
Steve Kamman, CIBC.
STEVE KAMMAN - OBC - ANALYST
Can you hear me?
OPERATOR
We can hear you.
STEVE KAMMAN - CIBC - ANALYST
My one thought as suggestions for the name is either L'Electricite de [Ia
Ouest] or (indiscernible) or something along those lines.
PAT RUSSO - LUCENT TECHNOLOGIES - CHAIRMAN, CEO
Steve, could you just say those again?
STEVE KAMMAN - CIBC - ANALYST
Electricite de la Ouest -- Western Electric, for those of you who don't speak
French. And then I think it was (indiscernible).
All right. Actually, to get on to the serious question, which is in terms of --
obviously, particularly in Lucent, you have some pretty significant
partnerships -- Juniper in the optic space as well. Can you just talk through
how that is going to flow through as you put the two companies together,
[optic] and the IT space?
And then, Pat, any understandings or thoughts in terms of succession? Obviously
-- and I think that the previous question -- Mike and Frank are both very
quality people; I'd hate to lose either ofthem. Any thoughts in terms of how
that is going to work?
14
PAT RUSSO - LUCENT TECHNOLOGIES - CHAIRMAN, CEO
Mike or Serge, feel free to jump in here. I would say, Steve, we both enjoy --
Lucent and Alcatel both enjoyed partnerships. And as you know as well as I,
partnerships in this industry have been increasingly important over the last
few years.
And so we value our partnerships. I think as we progress forward, we will be
looking at all of those partnerships. We will try to extend and leverage those
to the extent that we can, and where in fact we have to get something sorted
out, we will sort it out. But I think partnerships as a matter of strategy will
continue to be important for us as we go forward.
Secondly, your comment about both Mike and Frank. I will tell you I am
absolutely delighted at the breadth and depth of talent that the combined
companies have with respect to the management team of this company going
forward. And it would be my goal and objective that we leverage the skills and
the capabilities and the relationships that they have established to assure
that we are successful as we bring these companies together and go forward.
And I think Mike said it well when he said he is looking very forward to
working very closely with Frank, as we take on the task of integrating and
combining these companies and competing even more effectively in the
marketplace. Serge, anything you want to add to that?
SERGE TCHURUK - ALCATEL- CHAIRMAN, CEO
I fully support what you said. Does anyone here want to add something? No.
That is fine, thank you.
STEVE KAMMAN - CIBC - ANALYST
Thank you.
OPERATOR
Paras Bhargava, BMO Nesbitt Burns.
PARAS BHARGAVA - BMO NESBITT BURNS - ANALYST
Good day. Just a question, Pat. You gave us a lot of details on your pension
issues. We have had someone from your -- who is the president of the Lucent
Retirees Association, Ken Raschke, say some things. And as we look at the
Series 420 transfers that are still in front of Congress, what process do you
need to follow going forward to deal with both of these constituencies? And is
the merger contingent on getting approval from both of these two
constituencies? Thanks.
PAT RUSSO - LUCENT TECHNOLOGIES - CHAIRMAN, CEO
First of all, the merger is not contingent on getting approval. We indicated
some time ago that we were working with the CWA and IBEW to secure legislation
that would be specific to Lucent, that would enable us to utilize 420 transfer,
really expanded the 420 transfer capability, and we are continuing to work in a
very collaborative way toward that end. And that, as you may know, is working
its way through Congress as part of the pension legislation that is under
considersation.
So we've said and continue to say, we take very seriously the relationship with
our retirees. We've worked very hard to continue to maintain benefits that both
recognize the contributions they have made and that are affordable, and we will
continue to do that.
15
OPERATOR
Inder Singh, Prudential.
INDER SINGH - PRUDENTIAL- ANALYST
Thank you very much. I wanted to just ask a couple of questions. You have
obviously looked at the cost synergies quite closely, and I do think that you
have come up with a pretty compelling case in terms of the headcount as well as
the process synergies you might see.
At the same time, I think you are optimistic of getting some revenue synergies.
What I would like to know is, have you had a chance to talk to some of your
customers, both on the Alcatel side as well as on the Lucent side, and have
they said to you or suggested that by integrating the IPTV and VoIP areas,
let's say, from Alcatel with sort of IMS, wireless and services from Lucent,
that that puts together a compelling portfolio they are looking for, which will
help you garner more markets hare?
I mean clearly, you are really putting together a very powerful sort of $25
billion company. Do you expect that you'll be able to derive some of those
revenue synergies as well and what gives you that confidence? Thanks.
SERGE TCHURUK - ALCATEL- CHAIRMAN, CEO
If I may, Pat, Mike will take over this question. I may add a few words. I'm
sure Pat may also do. So go ahead, Mike.
MICHAEL QUIGLEY - ALCATEL- COO
If I could start by saying, yes, we certainly had some discussions with some of
our major customers, as you would expect us to do. And I have to say, overall,
our customers are quite enthusiastic about the combined strength the two
companies bring, to bring them end-to-end solutions just exactly along the
lines as you talked about. If you think about the strength of the two
companies, Alcatel, with what it's established in the infrastructure, routing,
IPTV, and Lucent, with what has been done in IMS and NGN, we bring quite a
powerful combination, which our customers see the potential of, particularly as
we move more and more towards a converged world of triple play, which is video,
high-speed Internet and voice and Wireline and wireless integration together.
This is a complex equation for even our biggest customers to deal with.
They, I think, look forward to having a very, very strong partner who has
managed and mastered all of the technologies necessary to make this happen. And
as Pat emphasized, not only have all the technologies, but have the service
capability and the integration capability to make this all happen.
SERGE TCHURUK - ALCATEL- CHAIRMAN, CEO
If I just can add one word. I am frankly impressed by all the customers whom I
have talked to recently, not about obviously this merger. But they have all
indicated their desire to see our industry consolidate. And all are pushing us
to participate into it. And I should say (indiscernible) because some people
should say maybe the Alcatel/Lucent might be the right combination. So
obviously, I could not comment on it.
But it is a bit paradoxical that customers want suppliers to merge. But
customers want to have, in the long term, a partner which will be around and be
strong and reliable.
16
FRANK D'AMELIO - LUCENT TECHN%GIES - COO
It's Frank. If I can just echo what Serge and Mike said. We've obviously had
extensive discussions with customers as well, and really, it is not -- it is
more than just --I will call it IPTV or IMS. It is really the Wire line
portfolio, the mobility portfolio, the services portfolio. The combined assets
of each company into each of those areas, really, is being well-received
because when you do the one plus one, you get much more than two in each of
those areas.
INDER SINGH - PRUDENTIAL - ANALYST
Thank you.
OPERATOR
Roger Cheng, Dow Jones.
ROGER CHENG - DOW JONES - ANALYST
I just had a quick question on the market value. I noticed it was based on
Friday's closing prices. The terms are actually below what Lucent was trading
at on Friday. I'm wondering how -- if you could provide more detail as to how
the terms were determined. And I guess what you can say to Lucent shareholders
who are going to have to sell their stock -- or change their stock for
something at lower value than it was it was on Friday.
JOHN KRITZMACHER - LUCENT TECHNOLOGIES - CFO
This is John Kritzmacher, the CFO for Lucent. The exchange ratio in our
transaction, as we've said previously, the exchange ratio was intended to
represent an at-market transaction. And as is typical with deals of this
nature, we selected a trading interval to average out for the trading ratio;
that interval preceded our final signing of an agreement by some small period
of time. And the average ratio turned out at the close on Friday to be a very
slight discount to Lucent holders.
You know, there is going to be some variation in the market as we trade from
day to day, but at the end of the day, the variance is very minor. And in fact,
it reflects some improvement in Lucent's relative value over the period of
time, as news of our combination began to leak. So we would argue, given
improvement in our share price over the past week, along with the normal
practice of an at-market transaction, that in fact this is a very fair and
equitable deal for Lucent shareholders and for Alcatel's shareholders.
ROGER CHENG - DOW JONES - ANALYST
Thank you.
OPERATOR
Eiji Ono, Credit Suisse First Boston.
EIJI ONO - CREDIT SUISSE FIRST BOSTON - ANALYST
Hi, it is Eiji from Credit Suisse here. Two questions. First, some details on
the Lucent pension issues. First, there is about a $5.1 billion unrecognized
net loss in terms of the pension side. I'm wondering if that has to be
recognized in a merger like this?
17
Second, if you are able to net off the pension benefits and the post-retirement
obligations, it still looks like you're going to be in a net deficit of about
2.4 billion. Can you check if that is correct? If so, is that something that
will have to be funded in the future and how?
A follow-up question for Jean-Pascal. You said in Kulbinder's previous question
you expect margins in the 10 to 20% range to be reasonable in the future.
Obviously, that is quite a large range. I just want to bring up something that
we did go through with Alcatel in the past, I think in 2004, when we were
talking about some of the future margin potential in cost-cutting, etc. Some of
the back-of-the-envelope numbers we came out to for Alcatel potentially getting
to margins of about 14 or 15%. But obviously, I think the fixed cost reductions
came through, but the gross margin benefits did not. If we see a similar
progression this time around, again is the 10 to 20 correct, or is it going to
be more 10 to 15 or somewhere within there?
Lastly, just on the diluted shares, can we get an exact number of what the
expect diluted shares to be once this transaction is done, including all the
convertibles, etc., just so we can get an actual number to work off? Sorry for
all those different questions, but if we can get some answers on them, I would
be very appreciative. Thanks.
JOHN KRITZMACHER - LUCENT TECHNOLOGIES - CFO
This is John Kritzmacher. With regard to the matter of pension assets and
liabilities, we will do a reconciliation of our balances to reflect the fair
value of assets and the present obligations for the liabilities. So there will
be an adjustment. We have not sized that precisely, and we will not until we
approach closing and work through that and other matters related to our
purchase accounting.
Mark, would you like to address the matter of shares?
MARK GIBBENS - LUCENT TECHNOLOGIES - TREASURER
We will be able to come out with, in a fairly short period of time, the number
of shares that would be outstanding. But as I think was mentioned earlier, this
does not require the putting of the convertibles that we currently have
outstanding, so you should be able to utilize, for the time being, the number
of shares that we normally report on a diluted share count basis, which in each
quarter roughly tends to be on the order of 5 to 5.1 billion shares outstanding
from a Lucent perspective.
JEAN-PASCAL BEAUFRET - ALCATEL- CFO
The pension obligation, I believe that this is true, that reporting -- the
combined companies reporting under IFRS standards would probably change the way
we account for pension obligations and OPEB obligations, but not in a
detrimental way for the overall strong balance sheet of the combined company.
This is one point.
The second point, Eiji, you mentioned the potential of margin improvement,
which we had said -- which we had anticipated in 2004, at the time when the
market was quite different. The market proved to be mid 2004 some tougher--
some tough in terms of competition, and we have reacted promptly to that. Both
companies have reacted promptly to that and have continued their improvement in
margin and their efforts in reducing their costs. We believe that basically
improving the margin will come of the improved purchasing power we will get in
this combination.
So the range I gave, 10 to 20%, is not specific enough today because we are not
here to guide on the combined company. We are just here to give you the type of
advantages of such a combination, which is basically on the gross margin side
to gain some purchasing power and negotiation power vis-a-vis the customer.
18
SERGE TCHURUK - ALCATEL- CHAIRMAN, CEO
If I may add, I [still] think the most powerful product architecture available
in the two companies to mechanically increase the margins.
OPERATOR
Mark Sue, RBC Capital Markets.
MARK SUE - RBC CAPITAL MARKETS - ANALYST
Is there a term limit for your position or will you be given the flexibility to
execute under the guidance of the Board? And have you decided on the final COO
and CFO positions, and are there term limits for these positions?
PAT RUSSO - LUCENT TECHNOLOGIES - CHAIRMAN, CEO
I'm sorry -- I didn't hear the first part of the question.
MARK SUE - RBC CAPITAL MARKETS - ANALYST
Is there a term limit for the CEO position at the moment, or do you think
you'll be given the flexibility to execute?
PAT RUSSO - LUCENT TECHNOLOGIES - CHAIRMAN, CEO
A term limit. No, I will be negotiating an employment agreement, as you would
expect, forthis new position with the combined company and with the Board, as
appropriate. And when in fact that is concluded, I'm sure it will be disclosed
publicly.
And then the second part ofthe question was --?
MARK SUE - RBC CAPITAL MARKETS - ANALYST
COO and CFO.
PAT RUSSO - LUCENT TECHNOLOGIES - CHAIRMAN, CEO
COO and CFO.
MARK SUE - RBC CAPITAL MARKETS - ANALYST
For the combined entity.
PAT RUSSO - LUCENT TECHNOLOGIES - CHAIRMAN, CEO
I believe we put in the press release today that Mike Quigley is assuming the
role of Chief Operating Officer and Jean-Pascal Beaufret is assuming the role
as Chief Financial Officer for the combined company.
19
MARK SUE - RBC CAPITAL MARKETS - ANALYST
Yes, and is that just for a specific time frame or are they also under
employment negotiations?
PAT RUSSO - LUCENT TECHNOLOGIES - CHAIRMAN, CEO
There is no stated time frame at this point in time. Those are responsibilities
we expect to carry forward, and if we end up with some kind of employment
agreement, then we will make that known.
MARK SUE - RBC CAPITAL MARKETS - ANALYST
Okay. Well, thank you and good luck, everybody.
PAT RUSSO - LUCENT TECHNOLOGIES - CHAIRMAN, CEO
Thank you.
OPERATOR
Sandeep Malhotra, Merrill Lynch.
SANDEEP MALHOTRA - MERRILL LYNCH - ANALYST
Thank you. I wanted some clarification on the combined company's position in 3G
UMTS. Could you please comment separately on the strength that Lucent and
Alcatel bring to the table, and also talk about how the two platforms will be
rationalized into one platform going forward?
MICHAEL QUIGLEY - ALCATEL- COO
Would you like me to take that one, Pat?
PAT RUSSO - LUCENT TECHNOLOGIES - CHAIRMAN, CEO
Let me start, and I think it will probably be a combination of both of us, and
Frank is here with me as well. A couple of comments. First of all, as you all
know, the third generation technology platform is a spread spectrum technology.
Lucent is the global leader in CDMA, which is the same technology base, if you
will, as 3G.
And so we, Lucent, start from a place of tremendous depth and breadth around 3G
technologies in general, and we have worked to leverage that with respect to
technology deployment and platform deployment around UMTS or wideband CDMA. We
have announced two agreements publicly, one being 02 in the UK; and as well, a
very large contract with Cingular here in the United States, for their UMTS
deployment.
I will let Mike comment on the positioning that Alcatel [currently] has, and
then we will come back and let Frank and Mike comment on the work the teams
have done with respect to how we see this going forward.
20
MICHAEL QUIGLEY - ALCATEL- COO
Well, if I perhaps just could start off by saying that one of the clear
advantages, if you think about it, of the two companies coming together is just
the magnitude of the strength we bring in the R&O. I mean, we really have now
huge scalability in our R&O investment. So we have big capacity to pump R&O
into this.
Just complementing what Pat has said, on the Alcatel side, we have a very
strong 2G footprint, which complements what we see with Lucent, obviously, in
COMA. And let's not forget also, as we move toward UMTS wideband CDMA, the
expertise that Lucent's technology brings in CDMA can be a big asset.
We've got a lot of assets we've talked about as well in terms of software
defined radios. We've got, I think, over 50 networks which are 3G ready today
in Alcatel. So when you add the two capacities of the two companies together, I
think it is quite formidable.
FRANK D'AMELIO - LUCENT TECHNOLOGIES - COO
The only thing I would add, because Pat and Mike really covered most of it, is
just two comments here. One is the combined embedded base, from both a CDMA and
GSM perspective, coupled with the progress we've been making in UMTS, really
creates just a huge embedded base and ongoing opportunity for the company. And
then most importantly, we will make sure we do the things we need to do to
continue to satisfy and delight our customers in this area and the other areas
that we do business in.
SANDEEP MALHOTRA - MERRILL LYNCH - ANALYST
If I could just ask a follow-on question related to cost synergies. The NPV
number stated is US$12 billion, which is one-third of the combined market cap,
$36 billion. And in response to earlier question, I think Pat mentioned that
half the costs in the deal come from headcount reduction, which would imply an
NPV of $6 billion from headcount reduction, whereas the actual headcount
reduction mentioned in the presentation that was discussed is 10%. I'm trying
to reconcile the two. Should we be expecting a higher number of layoffs than
10%?
FRANK D'AMELIO - LUCENT TECHNOLOGIES - COO
No, you should not be expecting a higher level of layoffs than 10%.10% is the
correct figure. The impact around synergies from headcount reductions versus
other aspects of the operations was given as a very round figure, that roughly
half will come from headcount.lt will tend to be skewed a little bit more
toward headcount; it was just intended as a round number. The head count number
that we've given in terms of 10% reductions is accurate.
SANDEEP MALHOTRA - MERRILL LYNCH - ANALYST
Thank you.
OPERATOR
Paul Sagawa, Sanford Bernstein.
21
PAUL SAGAWA - SANFORD BERNSTEIN - ANALYST
A quick one, and then one a little more philosophical in nature. The net loss
carryforwards that Lucent has --I think Alcatel has some too -- what are the
mechanics of how those will get recognized in the combined company? Is there
any change in that?
Second of all, if we think about the R&D that Mike has been talking about and
the ability to officially afford a more comprehensive R&D program, levering
against your revenue base, brings up generally speaking, just how much
economies of scale there is in this business for those sort of things. So if
you think about the major growth opportunities --IPTV, IMS, 3G, routing and
optical space -- what kind of marketshare does a company need to have in order
to afford a competitive R&D program? Certainly your competitor in Canada has
mentioned they think they need to get 20% marketshare in important markets in
order to be viable.
Is that really a fundamental driver of needing to do this deal in order to get
yourselves in every major category at that level? Against that, how many
competitors do you think, long run, really can stay with a combined Alcatel and
Lucent in these important technology arenas with this kind of an R&D program? I
would imagine not many.
JOHN KRITZMACHER - LUCENT TECHNOLOGIES - CFO
Let me take the matter with regard to NOLs and then I will hand off. With
regard to net operating losses, both on Alcatel's ledger as well as on
Lucent's, we expect that as we combine, we will, as we've indicated throughout
today's presentation, be more profitable. The generation ofthose profits will
improve our opportunity to utilize those NOLs that we are carrying. In
particular, we carry large NOLs here in the U.S., and we expect to be more
profitable here in the U.S.
And as we demonstrate that we can take advantage of those NOLs, we will write
their value back onto our books and utilize them.
PAT RUSSO - LUCENT TECHNOLOGIES - CHAIRMAN, CEO
Paul, let me just make a comment on the more philosophic part of your question,
and then see if Serge or Mike have anything they want to add.
I think regardless of whether you come at this as what marketshare do you need
or what market position do you need in a particular segment, I think at the
most fundamental level, this is an industry where size and scale matter. And it
matters increasingly when you think about the competitive nature of what is
going on, the R&D intensity and the complexity of what it is that is happening
with respect to networks, and the innovative necessity, if you will, to create
differentiating offers.
And so what I think is really exciting about this combination and really back
to Mike's point in responding to the question on UMTS, is the investment
capacity and the R&D capacity that this combined company has will be
unparalleled in the industry. And it will give us the capability not only to
have the breadth of portfolio we need to deliver end-to-end solutions, but the
flexibility to continue to innovate in the arenas that are going to matter with
respect to creating new differentiation.
So as we looked at this, there is no question that this is an R&D intensive
industry. Competition is increasing and size and scale really matter. So that
is one of the compelling aspects of this combination, and I think it will make
a huge difference for us in the marketplace.
SERGE TCHURUK - ALCATEL- CHAIRMAN, CEO
If I can add one word to this. To a large extent, the product portfolio of
Alcatel and Lucent is sort of overlapping -- not completely, but to a large
extent. Adding up the two research teams and shrinking a bit, gives a lot more
R&D power, actually, for a given
22
unit of sales. And that is a basic rules of achieving economies of scale in
R&D, by amortizing R&D on a much broader base -- that is what it is, actually.
Okay, so I think we have come to the end of this session, Pat, unless you want
to say something else?
PAT RUSSO - LUCENT TECHNOLOGIES - CHAIRMAN, CEO
No, Serge, Ijust want to thank everybody for joining us. Appreciate your
interest and look forward to communicating with them more as we go forward.
SERGE TCHURUK - ALCATEL- CHAIRMAN, CEO
Okay. Thank you all.
OPERATOR
Thank you. Ladies and gentlemen, this conference will be available for replay
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23
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS AND OTHER IMPORTANT INFORMATION
This transcript contains statements regarding the proposed transaction between
Lucent and Alcatel, the expected timetable for completing the transaction,
future financial and operating results, benefits and synergies of the proposed
transaction and other statements about Lucent and Alcatel's managements' future
expectations, beliefs, goals, plans or prospects that are based on current
expectations, estimates, forecasts and projections about Lucent and Alcatel and
the combined company, as well as Lucent's and Alcatel's and the combined
company's future performance and the industries in which Lucent and Alcatel
operate and the combined company will operate, in addition to managements'
assumptions. These statements constitute forward-looking statements within the
meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such
as "expects," "anticipates," "targets," "goals," "projects," "intends," "plans,"
"believes," "seeks," "estimates," variations of such words and similar
expressions are intended to identify such forward-looking statements which are
not statements of historical facts. These forward-looking statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions that are difficult to assess. Therefore, actual outcomes and results
may differ materially from what is expressed or forecasted in such
forward-looking statements. These risks and uncertainties are based upon a
number of important factors including, among others: the ability to consummate
the proposed transaction; difficulties and delays in obtaining regulatory
approvals for the proposed transaction; difficulties and delays in achieving
synergies and cost savings; potential difficulties in meeting conditions set
forth in the definitive merger agreement entered into by Lucent and Alcatel;
fluctuations in the telecommunications market; the pricing, cost and other risks
inherent in long-term sales agreements; exposure to the credit risk of
customers; reliance on a limited number of contract manufacturers to supply
products we sell; the social, political and economic risks of our respective
global operations; the costs and risks associated with pension and
postretirement benefit obligations; the complexity of products sold; changes to
existing regulations or technical standards; existing and future litigation;
difficulties and costs in protecting intellectual property rights and exposure
to infringement claims by others; and compliance with environmental, health and
safety laws. For a more complete list and description of such risks and
uncertainties, refer to Lucent's Form 10-K for the year ended September 30, 2005
and Alcatel's Form 20-F for the year ended December 31, 2005 as well as other
filings by Lucent and Alcatel with the US Securities and Exchange Commission.
Except as required under the US federal securities laws and the rules and
regulations of the US Securities and Exchange Commission, Lucent and Alcatel
disclaim any intention or obligation to update any forward-looking statements
after the distribution of this transcript, whether as a result of new
information, future events, developments, changes in assumptions or otherwise.
IMPORTANT ADDITIONAL INFORMATION WILL BE FILED WITH THE SEC
In connection with the proposed transaction, Alcatel and Lucent intend to file
relevant materials with the Securities and Exchange Commission (the "SEC"),
including the filing by Alcatel with the SEC of a Registration Statement on Form
F-6 and a Registration Statement on Form F-4 (collectively, the "Registration
Statements"), which will include a preliminary prospectus and related materials
to register the Alcatel American Depositary Shares ("ADS"), as well as the
Alcatel ordinary shares underlying such Alcatel ADSs, to be issued in exchange
for Lucent common shares, and Lucent and Alcatel plan to file with the SEC and
mail to their respective stockholders a Proxy Statement/Prospectus relating to
the proposed transaction. The Registration Statements and the Proxy
Statement/Prospectus will contain important information about Lucent, Alcatel,
the transaction and related matters. Investors and security holders are urged to
read the Registration Statements and the Proxy Statement/Prospectus carefully
when they are available. Investors and security holders will be able to obtain
free copies of the Registration Statements and the Proxy Statement/Prospectus
and other documents filed with the SEC by Lucent and Alcatel through the web
site maintained by the SEC at www.sec.gov. In addition, investors and security
holders will be able to obtain free copies of the Registration Statements and
the Proxy Statement/Prospectus when they become available from Lucent by
contacting Investor Relations at www.lucent.com, by mail to 600 Mountain Avenue,
Murray Hill, New Jersey 07974 or by telephone at 908-582-8500 and from Alcatel
by contacting Investor Relations at www.alcatel.com, by mail to 54, rue La
Boetie, 75008 Paris, France or by telephone at 33-1-40-76-10-10.
Lucent and its directors and executive officers also may be deemed to
be participants in the solicitation of proxies from the stockholders of Lucent
in connection with the transaction described herein. Information regarding the
special interests of these directors and executive officers in the transaction
described herein will be included in the Proxy Statement/Prospectus described
above. Additional information regarding these directors and executive officers
is also included in Lucent's proxy statement for its 2006 Annual Meeting of
Stockholders, which was filed with the SEC on or about January 3, 2006. This
document is available free of charge at the SEC's web site at www.sec.gov and
from Lucent by contacting Investor Relations at www.lucent.com, by mail to 600
Mountain Avenue, Murray Hill, New Jersey 07974 or by telephone at 908-582-8500.
Alcatel and its directors and executive officers may be deemed to be
participants in the solicitation of proxies from the stockholders of Lucent in
connection with the transaction described herein. Information regarding the
special interests of these directors and executive officers in the transaction
described herein will be included in the Proxy Statement/Prospectus described
above. Additional information regarding these directors and executive officers
is also included in Alcatel's Form 20-F filed with the SEC on March 31, 2006.
This document is available free of charge at the SEC's web site at www.sec.gov
and from Alcatel by contacting Investor Relations at www.alcatel.com, by mail to
54, rue La Boetie, 75008 Paris, France or by telephone at 33-1-40-76-10-10.