While I think the proposed Lucent Technologies Inc. (LU) and Alcatel (NYSE: ALA) merger is a good idea, as a Lucent investor I have some concerns with the pricing of LU shares. The latest news has Alcatel acquiring Lucent at market price. The estimated value of the combined company will be $34 billion. I doubt Lucent investors are very happy with this.
At the close of Friday's trading, Alcatel’s market cap was $20.52 billion and Lucent’s was $13.68 billion. The combined market caps already exceed the $34 billion dollar estimated value of the combined companies. News outlets are already speculating about the current value of the companies. Here is a quote from a Reuters report:
Lucent’s market capitalization is about $12.6 billion, compared to Alcatel’s value of about $22 billion.
According to this, if LU shares were purchased using a $12.6 billion market cap, each LU share would be priced at $2.82. Normally the way I have seen acquisitions work is that the shares of the purchaser will go down because investors view the purchaser as taking an assumed risk, and shares of the company being acquired will rise. What we saw Friday is ALA and LU rise. The market appears to be assuming that the consolidation is a good idea for both companies and will lower risk overall.
But I don’t see how Lucent investors would be happy with a share price of $2.82, which is far lower than the company’s 52 week high of $3.49. From the same Reuters report:
Shareholders might not be happy about the proposed price, said Pranav Rawal, an equity analyst at Metropolitan West Capital Management LLC, a large Lucent shareholder.
As a Lucent investor I am definitely not going to be happy with a share price of $2.82. What I would consider fair is taking LU’s 52 week high of $3.49 and using that as a starting point. The yearly historical high of $3.49 reflects how the market priced LU using earnings, positive news and market conditions surrounding the company’s future prospects. A merger with Alcatel should obviously produce greater opportunity for Lucent than anything that has happened in the last year.
At $3.49, LU would have a market cap of $15.6 billion. If the combined deal value remained at $34 billion, that would place ALA’s market cap at $18.4 billion or $14.05 per share. This is not a far stretch considering shares of ALA have traded exactly at $14.05 as the low in the last 2 weeks.
I believe for a 'merger of equals', as some news outlets are calling this merger, LU’s share price has to go up and ALA’s share price has to go down for the markets caps to be closer in value. The current $10 billion disparity, as the above report prices the two companies, has ALA valued almost twice that of LU. That’s certainly not a merger of equals in practical price terms.