The Big Score?

“What’s an Alcatel?” that’s the question investors across the U.S. might have been asking last week after it emerged that the comparatively low-profile French telecom-equipment giant was in merger talks with erstwhile Wall Street heartthrob Lucent Technologies.

It was only 18 months ago that Lucent was trading near $80 a share and was America’s most widely held stock. Lately, the stock price has been hovering around $10, and the news of a possible Alcatel deal further depressed the stock price, inching it closer to the $9 mark. (In all, the company has lost an astonishing $200 billion in shareholder value in the last year and a half.) Alcatel’s investors were just as unhappy, and perhaps with greater justification. Alcatel has problems of its own: its stock is down around 65% from its high last year — and a merger with Lucent would reap some $2 billion in short-term debt.

Why would Alcatel’s ambitious CEO Serge Tchuruk ever want such a headache?

Tchuruk and other Alcatel managers weren’t answering these kinds of questions last week. But it’s no secret that Alcatel has long had a fixation on making a splash in America, from which it currently gets just 22% of its sales. Sure, it’s a huge market for telecom equipment, but that’s not all. Even after the recent downturn, the U.S. stock market remains a deep pool of capital. Alcatel has already tried raising its U.S. profile this year with an ad campaign featuring, to the disdain of civil rights groups, footage from Martin Luther King Jr.’s “I have a dream” speech. The ads don’t say anything about Alcatel’s products — in fact, they are bewilderingly opaque — but given that those products are things like asynchronous transfer-mode data switches, it seems a safe bet that the spots are aimed at investors, not customers. Perhaps the pass at Lucent is just another way of saying, “Hey, guys, we’re a player.”

A player, but not yet Premiership level — at least not in telecoms. According to tech consultancy IDC, based in Framingham, Mass., $30 billion Alcatel ranks fourth, behind Cisco, Nortel and Lucent, in data-equipment sales to telecom service operators.

Tchuruk, though, clearly has ambitions to be more than an also-ran. Brought into the company as chairman in 1995 with a reputation of something of a turnaround artist — based on his previous stints at France’s Total in the early 1990s after returning CDF Chimie, a French chemicals company, to profit — the 64-year-old Tchuruk has aggressively remade Alcatel since his arrival. Inheriting an unwieldy conglomerate with operations in everything from atomic power to vineyards, Tchuruk stripped the company down and shifted its focus squarely on the telecom business. Among his moves was to go on a buying spree in North America, snapping up seven companies including DSC Communications Corp., a midsized telecommunications equipment maker based in Dallas, Texas in 1998, and Newbridge Networks, a Canadian maker of data switches, last year.

Under Tchuruk’s leadership Alcatel gained strength in such high-growth areas as digital-subscriber line technology, which is used for broadband Internet access — and where Alcatel has an estimated 50% share of the global market — and fiber-optic components.

But while Alcatel is clearly a more focused company than it was when Tchuruk arrived, questions remain about how well the company is positioned for the future. Analysts have raised questions about the fact that profit margins for its telecom activities remain below targets, and that Alcatel has failed to gain significant market share for its mobile handset and next generation wireless infrastructure business.

Given all this, why take on the problem of Lucent — a company that lately has had nothing but commercial, financial and management woes, including the recent high-profile ousting of a chief financial officer who reportedly alienated colleagues by, among other things, bringing her “personal career coach” to a staff meeting?

For one, the merger would create, in terms of total revenues, one of the world’s biggest telecommunications equipment makers, not a bad thing for Tchuruk to put on his résumé. For another, despite the pummeling it has take in the stock market, Lucent — which set a record for the biggest ipo in history when it was spun off from AT&T in 1996 — still retains some glossy assets, among them a huge U.S. sales force and customer base and the research capabilities of its highly regarded Bell Laboratories. (Although any deal involving a foreign takeover of that research facility, which does some highly sensitive work for U.S. agencies, will certainly come under close scrutiny by regulators in Washington.) Moreover, Lucent’s wireless infrastructure equipment, which is based on a different technology from Alcatel’s, could be an important factor in the French company’s expansion into Asia.

And, of course, there’s always that catchall explanation of “economies of scale” that gets trotted out whenever a questionable merger is being justified. In the case of Lucent and Alcatel there could, indeed, be enormous potential cost savings on the R&D side, but only if Alcatel does a better job of absorbing its new partner’s operations than some of its critics say it has done so far. “We have not seen substantial synergies,” says Neil Rikard, research director for networking in the U.K. office of technology consultancy Gartner Group, speaking of Alcatel’s handling of its U.S. acquisitions. “It is like they are separate companies that happen to carry Alcatel business cards.”

All this, of course, rests on the deal actually going through, which looked likely late last week, but still could falter. In fact, the Financial Times reported that Alcatel’s move may have put Lucent in play, with such rivals as Ericsson said to be contemplating a run at Lucent’s wireless infrastucture business, if not the entire company itself. Stay tuned.