Shareholders of French telecom giant are expected to approve the company's nearly $11B acquisition of Lucent.
PARIS (Reuters) -- Alcatel shareholders are expected on Thursday to vote in favor of the French network supplier's $10.9 billion acquisition of U.S. rival Lucent, more out of resignation than enthusiasm for the deal, analysts say.
Investors do not have much choice even if they agree that Alcatel is overpaying forLucent (Charts), particularly in light of its profit warning in July.
Analysts predict shareholders would lose more in the short and medium term if they scuppered the transaction than if they allowed it to proceed.
Blocking the merger would put Alcatel in a vulnerable position against rivals and raise uncomfortable questions about its growth strategy.
It would also put pressure on Alcatel's top management to resign, creating uncertainty about the quality of any new team.
"If they (shareholders) vote no, (Alcatel Chief Executive) Serge Tchuruk would have to go, the company would find itself isolated and by 2007 it would become obvious that it was lacking scale to compete," WestLB analyst Thomas Langer said.
Investors are also conscious that Alcatel and Lucent need to widen their global footprint and sharpen their product and marketing pitch as customers and competitors merge.
This year alone, rival Siemens joined forces with Nokia and giant Ericsson completed the acquisition of Marconi's network equipment assets.
Lucent and Alcatel fit together well geographically and by combining their suppliers and research and development activities, they will be leaner as well as more versatile. They can cut costs and convince customers to pay a little extra.
"Alcatel needs critical mass to resist pricing pressures," said analyst Remi Thomas at Cheuvreux.
Costly venture
But no matter how attractive the merger's strategic rationale is, the French investment advisory firm Proxinvest and many analysts have said they believed Alcatel was paying too much for Lucent.
Alcatel is offering Lucent shareholders 0.1952 of an Alcatel share for every Lucent share they own, valuing each Alcatel share at about five Lucent shares, an exchange rate Proxinvest and investors wished was raised to seven.
Alcatel and Lucent's shares have lost more than 25 percent since the merger was unveiled in early April but they could drift further in the medium term if the deal unravels.
But Tchuruk, who will become group chairman, made clear last week in interviews with Les Echos and the French weekly Investir that merger terms would not be renegotiated.
"The share prices of the two companies are now linked to each other and it is not possible to change the merger share-swap ratio," Tchuruk told Les Echos in a report published on Thursday.
Break-up fee
If shareholders block the merger and a rival offer is made, Alcatel will also have to pay Lucent an initial break-up fee of $250 million and possibly $500 million if a deal is done with another company within the next 12 months.
But no matter how long the list of negative consequences a "no" vote would bring, it does not make the pill easier to swallow, analysts and investors say.
The merger comes attached with strings that appear to strengthen the current management's job security and its position vis-a-vis shareholders, Proxinvest and analysts say.
For example, in the first three years after the merger is completed, the board would need two thirds of votes to oust Tchuruk and future Alcatel Lucent Chief Executive Patricia Russo, under a resolution to be presented to investors.
In most boardrooms, a simple majority is required.
At Thursday's annual and extraordinary meeting, shareholders will also be asked to vote on a resolution that allows Tchuruk, who turns 69 in November, to remain chairman of the combined group for a relatively long time.
The traditional age limit of 70 only applies if more than a third of the board is over 70.
Tchuruk, who has been at Alcatel's helm for more than a decade, is one of the few technology chief executives in Europe to have survived the Internet and telecoms boom and bust of the past seven years.
On the other hand, some investors say that allowing Tchuruk to stay on brought stability to the company at a risky time.
The prospective difficulty of integrating the two companies' operations was heightened this week after Alcatel announced it had agreed to buy Nortel's lossmaking third generation UMTS cell phone network unit for $320 million.
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