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The following is a transcript of a conference call held on April 3, 2006
between certain executives of Lucent Technologies Inc. and employees of Lucent
Technologies Inc.
Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 1
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[BEGINNING OF LUCENT-ALCATEL ANNOUNCEMENT - 4/3/06 - FRANK D'AMELIO]
FRANK D'AMELIO: This is on, everybody hears me OK? Good morning, good
afternoon, good evening, thanks for joining me today. I wanted to give everybody
kind of a summary of some of what we discussed on yesterday's call relative to
the announcement we made, which was the combination of Lucent and Alcatel. I'm
going to use a subset of the charts that we used on our press conference call
yesterday. Pat and Serge actually went through this deck yesterday, I'm going to
pull from just a subset of that. That will take me probably 15, 20 minutes or
so, I'll run through those fairly quickly. I'll give you some highlights on each
of the charts, and then we can talk about the charts, or anything else you all
would like to talk about.
One thing is for sure, I never got a turnout like this when I was giving a
results presentation.
[LAUGHTER]
So, clearly...
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Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 2
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One other thing that I should mention, before I get into some of the
information, is I had an opportunity to travel to Paris yesterday with Pat and
the team, and obviously I didn't. Pat and I decided that I should stay here, and
basically have an opportunity to talk to our employees today, given it's really
the first business day following what was a major announcement. So that's why
I'm here and we wanted to make sure that we all had an opportunity to talk
together today. Then there will be an employee broadcast tomorrow, and Pat will
obviously be leading the broadcast, and they'll be a bunch of us that will chime
in if necessary. OK?
So, what I'll do is let me run through the charts. I think the way we'll
do this, because there's a bunch of folks here is why don't I run through all
the charts first, and then after I finish running through the charts, then we
can go through and I'll answer any questions, to the best of my ability, that
you all have.
And there will not be many financial charts in this presentation. I just
thought I'd mention that.
There is a forward-looking statement--
[LAUGHTER]
--and you all understand if I tell you anything I'm not suppose to tell
you, then I have to find you and kill you, and there's too many of you here, so
I cannot do that. All right? So, let's get serious and run through the [?rest,
actual?] of the charts.
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Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 3
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So first, one of the key questions has been, why merge? So, really, what's
the strategic rationale, why merge. And, really... and there's several reasons.
On a macro, macro level, it's all about enhancing shareholder value. If you look
at this, there's clearly a compelling strategic rationale. We believe we're
really creating the first global player in our space. If you look at some of the
facts here, decent customer relationships with every major service provider in
the industry. Industry leading R&D platforms. We'll have over 26,000 R&D
employees, basically delivering next generation stuff, new ideas, unparalleled
ability to offer, integrate end-to-end solutions, and a leader in converged
networks, clearly leveraging-off some of what we've done, for example, in IMS
space.
There's a common vision in innovation culture that will enable successful
execution. We've obviously gotten to know each other sum over the last few
weeks, and through diligence, through various meetings, through lots of
analytics, through lots of conference calls. It gives clearly some shared vision
about where the industry is going. Shared vision relative to innovation. And,
most importantly, shared vision, and it was shared kind of interest, relative to
a passion for winning. Which to me is always mission critical. I mean, you want
to be around people that are passionate about winning, passionate about what
they do everyday.
Clearly there's an ability to achieve significant synergies and enhance
the financial position of the combined company. These are big numbers -- 1.4
billion (euro), $1.7 billion U.S. dollars over a three year period, and we said
yesterday, the majority of that would come within two years. In fact, we showed
a chart in the press conference
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Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 4
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yesterday, that said we'd achieve about 70%... I better not go near these
speakers... about 70% of that 1.7 billion U.S. Within two years, the combined
company allowed 25 billion in U.S. revenue, 21 billion in (euro), a big company,
and you can see the cash, and the cash is always good, 9 billion (euro), 11
billion U.S., and net cash, not net debt.
And you know, one of the things I've always kind of talked about, you
know, in my result presentations is, we've been a net debt company for our debt
and converts, exceeds our cash in marketable securities. In the new
organization, we'll actually be net cash, so our cash position will exceed our
debt and our converts, and that provides lots of, I call it, balance sheet
capability, lots of capital capacity.
And, let me just go back, I missed the last bullet on that previous chart,
the other thing here is the deal will be EPS secretive in the first year
following its close. So, if you remove restructuring charges, of which there
will clearly be some for this kind of a deal, and if you remove intangible
amortization, like they'll definitely be some goodwill, and we'll have to get
into the accounting for the various kinds of goodwill, whether it's in-process
R&D, or the like, if you remove those two, the deal will be accretive in
year-one. For those of you that have worked with me, or others in the
organization, on any kind of divestment, asset purchase, acquisition, accretion
in year-one is a very good thing, you typically don't get that when you're doing
these types of transitions, so a very good deal.
In terms of the transaction overview, of the combined market cap of the
combined company is 30 billion (euro), 36 million U.S., you all get a feel for
the conversion,
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Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 5
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right? We're using roughly 1.2. So, every euro 1.2 U.S. dollars. It's a
stock-for-stock merger that's a tax free transaction, and it's an exchange of
an Alcatel ADS as solution shares. The fixed exchange ratio is 1952,.1952. I've
been getting asked some questions today on, "Well, Frank, if you look at the
closing prices as of Friday, you would have gotten a slightly higher ratio. So
if you looked at Lucent, we closed Friday at, I think, about 3.05, and Alcatel
closed at about 15.40. I see heads nodding, because most of you are running the
numbers, I'm sure.
So, if you take the 3.05 and you divide it by 14.40, you'll get a ratio
that's like .198, instead of .1952. The reason for that is, the exchange ratio
was not calculated based on Friday's close. It was actually based on a period of
time prior to Friday's close, where a short interval between when that time
ended and when Friday actually took place. And, that's how deals typically get
done. They never really get done at the day of close. So, it's about as close as
you can get from an economic perspective on the exchange to a merger of equals.
You never can get them perfect, because you get a period of time that ends and
then the stock keeps trading. And part of why you do that is because of exactly
what happens with ourselves, right? A week ago Friday we had to go out with this
proactive announcement that we were in discussions, because news started to get
out that we didn't want to get out at that time, and that's typically why we
have these intervals between when the ratio calculation shuts down and when you
close, to really deal with these kinds of issues, which is exactly what happens
in our transaction.
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Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 6
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We'll own about 40% of the combined company. Alcatel share owners will own
about 60% of the combined company. Riding the zone of a merger of equals, by the
way. Kind of the range is typically 40/60, 60/40 or higher, or higher towards
50/50.
It will be listed on the Euro next and on the New York Stock Exchange, and
expect the closing in six to 12 months, subject to a variety of various
approvals, many of which are regulatory-related, government-related, to this
kind of a deal.
Now, let's talk about the company we're creating. They'll be incorporated
in France, with executive office in Paris, and the name of the company will be
determined at a later date. One of the questions I've been getting asked, you
know, in terms of where it was incorporated, why France?
Well clearly one reason is that's where Alcatel is; but we looked at many
things to determine where was the best place for the company to be incorporated.
We looked at tax issues. We looked at liquidity issues. We looked at corporate
governance issues. We looked at accounting. And we looked at the like, and we
concluded France was the best place. Really for all the above, but taxes had
kind of a lot to do with where we decided the company is being incorporated.
The North American Operating Headquarters and Global Bell Labs
headquarters, will be in New Jersey, which is where we are today, New Jersey.
The leadership of the company, a non-executive chairman will be Serge
Tchuruk. Pat will be the CEO of the company. See here, based in Paris, we can
come back and
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Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 7
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talk about that later, if you'd all like. Pat will obviously be bouncing around.
But she'll be spending time here. She'll be spending time in Paris. And she'll
be spending time out with customers, like she does today. Pat's out with
customers all the time.
In terms of the board composition, it will be an international board. Pat
and Serge will be on the board. And five current board members from Alcatel and
five current board members from Lucent, will be part of the board. And then two
new board members will be added, and those two board members will be European
directors, and they will be mutually agreed upon by the combined company.
In terms of creating the first true global communications solutions
provider, one thing about this company, among many things is, it's big. You can
see here, number one in wireline. Number two in mobility. Number two in
worldwide services. Clearly a leader in converged networks and services. And,
you know, you can just kind of list, we can go on for pages here, but the leader
in IP TV, next-gen, networks, IMS, 3G Spread Spectrum, the unique position in
services and integration, serve with the combined services business, for
example, extremely big. Presence in all major carriers. More diverse geographic
mix. I'll show you this on another chart. But, you know, if you look at our
revenues as a mutual fund. You know, we are very concentrated as a company.
Right? You know, two-thirds of our revenue is in North America. And if you look
at our 10(k)s for the last couple years, you know, 40% of our revenue, for the
total company, is with two customers. Now, if that's a mutual fund, that has
what we call a high beta, some risk.
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Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 8
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So if you look at our revenues today, roughly two-thirds are in North
America, the major piece of our revenue is with two customers. If you look at
Alcatel's revenues today, about half of their revenues are in Europe. And you'll
see this on the chart. When you combine the companies, you get this spread of
roughly a third of the revenue of the combined companies in North America, it's
like 34%. A third of the revenue is in Europe, which is 35%. And then the rest
of the world is roughly a third. So you get a much different kind of mix of
business. Lots of complementary fits throughout the two companies, that's one.
In terms of compelling benefits for our customers, clearly a comprehensive
R&D portfolio leveraging Bell Labs. A leading end-to-end communications solution
integrator. A leader in major areas defining next-gen networks. A local partner
in every region, yet with global reach. And a long-term strategic partner. If
you look at the R&D, I'll call it the income statement kind of... you know, I'll
call it the FASB equivalent, the IAS FASB equivalent, is almost 3 billion. If
you put 3 billion on 25 billion of revenue, you get about 12%. That 3 billion
doesn't include the software that we capitalize, per FAS 86, nor the fact that
we have that pension credit that also reduces our reported R&D. If you gross-up
the R&D for those two items, it's more of a cash R&D number, you get to about 3
1/2 billion. If you put 3 1/2 billion on two 25 billion, you're in the 14%
range. And under IAS accounting, they've actually started to capitalize some R&D
now, which would take the number up even a little bit higher.
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Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 9
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If you get into the approximately 15% of revenue range on R&D investments,
with a company that's got 25 billion in revenue, that is a machine, and our job
is to fuel it, and feed it and make sure we keep getting good stuff out of it,
right?
This is the revenue that I alluded to before, so if you just look, kind of
think about this as where we are today. So if you look at Alcatel, I said
roughly half of their revenue, 45% is in Europe, and then you can see where the
rest of it is by region. For North America, for Lucent, I said roughly two
thirds of our business is in North America. All revenues based on '05 calendar
year. Alcatel's on a 1/1 to 12/31 calendar year. Our fiscal year is really 10/1
to 9/30. Right? So this is all based on 1/1 to 12/31, apples-to-apples.
And then if you look at the combined revenues, Europe's at 35, North
America's at 34, and then you can see kind of the rest at roughly 31%, give or
take a third, a third and a third. Very kind of nice mix of business.
In terms of cost synergies, and I've been getting asked lots of questions
about this, you know, really every major area of the company that you can think
about, still be opportunities for synergies, right opportunities for
efficiencies. The corporate functions, information technology, supply chain and
procurement, sales and marketing, services, research and development. And let me
give a couple comments on each of these.
If you look here in terms of just some of the bullets, I mentioned this
before, they'll be approximately 1.7 billion U.S., and pre-tax cost synergies
within three years,
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Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 10
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with a substantial majority, which is at 70% that I alluded to, expected to be
achieved in the first two years. And charges to be recorded primarily in
year-one post-closing. So they're be... Now think about when we're going
through our restructuring, we had to take some very big charges, they'll be
similar charges that we'll be taking in year-one, following the close.
They'll be reductions in the work force of approximately 10%. I've been
getting asked lots of questions about this. Let me just spend a minute or two on
this, and then during the Q&A I'll answer anything that you all asked me about
this.
So the combined company will have 88,000 employees. So, 10% of that is
give or take about 9,000 people. In terms of where they'll come from, I don't
know yet. And quite frankly, what will drive it is kind of the business
rationale, the business logic. Right? We'll do what we believe is right for the
business, and obviously have kind of the operational decisions drive what the
head count implications will be.
But, obviously, we are acutely sensitive to this area. We want to try to
do it in the best way possible. We're actually thinking about what are some
proactive things we can be doing right now to help with this? So for example,
we're looking at what should we be doing with hiring now, as a company? Should
we, you know, kind of just do critical hiring to that, as attrition takes place,
which it will. We basically kind of leveraged that to our advantage, so that
when we worked the synergy numbers, there's less heads that have to come out. Do
you follow?
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Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 11
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So we're trying to do proactive things, you know, I call it to "kind of
quit or mitigate to a degree, or sniff," but try to manage this proactively and
take advantage of the time we have to start getting at this and kind of in an
intuitively correct way. So we're looking at things like that. I was actually on
the phone with Pat a lot over the weekend, this is one of the things that we
talked about, in terms of how do we leverage the time to basically... to try to
get proactively ahead of some of the things we're going to need to do here?
But remember, it's 9,000 out of 88,000, or the overwhelming majority of
the combined company, this is a very good thing. And then what we need to do is
work through, work through, the best we can, the synergy implications of the new
company.
And then as I mentioned before, a substantial majority of the
restructuring is expected to be completed within 24 months, after closing.
So just some key takeaways, I mean, basically this is the first chart. I
mean, it's really what I started off with to a degree, but there's a compelling
strategic rationale, there's a common vision in innovation culture. We talked
about the synergies. I mean, the way I think about this is if you look at the
complements, the complements [?carry?] the deal. If you look at things like
customers, markets, products. If you look at kind of all the major things, from
a complementary perspective, it really is a very good strategic fit. And then
the way you can measure that is based on the numbers.
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Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 12
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When the deal was rumored, you know, a week ago Friday, there was a bunch
of estimates made by various folks in the financial community, that had a range
in the synergies of about a billion to a billion in a half U.S. And, some folks
who have described a billion and a half, is the most optimistic here. We
obviously were in the high end of the range, right slightly above the high end
of the range, and we assume zero revenue synergy. This is cost synergies only.
So, clearly, the way you can measure, at least partially the strategic
fit, is based on, I would say, the numbers, right? And so the numbers clearly
demonstrate that to a degree. But when you look at this on various dimensions,
and I think it really does position us as THE carrier of the future, relative to
where we're positioned in all the next generation space. And you heard Pat and I
talk about this at the leadership team, in terms of the opportunity areas for
growth, the sweet spots in the industry, 3G, IMS, broadband access, metro
optical services, applications, the combined company is really very well
positioned in each of these areas.
So, I'll wrap this up, that's basically my prepared comments. I want to
take questions, and then what I'd like is maybe five minutes at the end to just
wrap this up with some concluding remarks.
So why don't we do some Q&A. And I know most of you in this room, so if I
don't get questions, I'll just call on people.
[LAUGHTER]
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Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 13
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OK. Yes.
MALE AUDIENCE MEMBER: Frank, one question, I think is on everybody's mind,
what means from the day-to-day operations perspective, what means from critical
projects we are doing right now?
D'AMELIO: So, this is a great question, it's actually a terrific first
question. The way to think about this for right now is we are two separate,
independent companies. And we are to continue to operate like two separate
independent companies. We're going to compete against each other for business.
We want to win every dollar of business that we can. The programs that we're
currently working on, we will continue to work on. We are two separate,
independent companies -- and that's how we want to continue to behave.
In terms of integration, like because you know, synergies require
integration, so that the integration work gets done and then you can get to the
synergy, the way to think about this, and in particular, this is part of my new
role. Right? Is from an integration perspective, we can do planning. So I make
sure I say that again, from an integration perspective, we can do planning. We
cannot do any implementing. So between announcements, which was yesterday, and
close, which we're ball parking at six to twelve months, we can plan
integration. We cannot implement anything. No implementation takes place until
we close. All righty?
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Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 14
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So in the interim, our job is to execute, execute, execute. All the things
we're working on, to continue to work on. All right? Next question.
Yeah, Peg.
PEG: Can you talk a little bit about the Bell Labs scenario that's being
formed?
D'AMELIO: Yes. In fact, we sent out a release today on this. Right? So,
one of the areas we've got to work through as part of the merger, is, I'll call
it, certain projects for the government. Which would include Bell Laboratories.
So one of the things we're looking at is this separate U.S. subsidiary, where we
would put those certain projects. It will have three, I'll call it, U.S. citizen
board members, we will nominate, that needs to be approved by the U.S.
government, and that work would be managed kind of as a separate sub with those
folks as what's called a Proxy Board. Not a board of directors, but like a board
of directors, but the term is called a proxy board.
In the release today, we actually nominated three people for the board.
And, Peg, you know this better than me, so if I screw this up, you could just
help me. One was Bill Perry, who was a former Secretary of Defense. One is on
James Woolsey, who is a former director of central intelligence. And the last
one was Kenneth Minahan, who's a former director of the National Security
Council. So, these are, of course, the right folks for this kind of proxy board.
You want folks that understand that industry, that understand security, that
understand what it is to work with the government, to know how to work with
classified, sensitive types of things, and so we've nominated three
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Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 15
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folks, and we'll obviously bring those forward to the government and work our
way through the process. So we'll require government approval for those
individuals. But that's what we did and it's really... And also, the question to
always ask is, "why?" And what you want to do is we want to make absolutely sure
that we contain, we compartmentalize basically those projects, that require,
I'll call it, containment. So that's what we did and that's why we did it.
Yes, a question in the back. Kathy?
KATHY: Frank.
D'AMELIO: Yep.
KATHY: We've called this a "merger of equals," is it safe to assume that
we'll have a new name and we won't take Alcatel or Lucent?
D'AMELIO: So, the short answer is "no." But only because of how you
phrased your question. You said, "Alcatel or Lucent." So, what I would say is
based on that question the answer is no.
By the way, I don't know what we're going to name the company, but the
reason I said no is, Lucent and Alcatel, or Alcatel and Lucent, both have lots
of brand value today, depending on the marketplace that you're in.
So, for example, in North America, Lucent has great brand value, great
brand recognition. And in Europe, Alcatel has great brand recognition.
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Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 16
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So one of the things what we're looking at, is there a way to not
necessarily do an "or," but to do an "and," and try to, I'll call it, you know,
"maximize the value that both brands bring."
Where if you try to create a new brand, not that we would, but once again,
we're working our way through this, the marketing folks call this an "empty
vessel." I learned this when we created Lucent, and I went through the process
back in '96.
The issue with "empty vessels," is they cost a lot of money. Right? And
from my perspective, if we've already got great brand value, we should try to
maximize that value, versus trying to invest in creating a new brand in
incremental value, which will require a bunch of capital investments to get it
done.
So we're looking at all of our alternatives; but my answer to your
question is "no," OK? Yeah.
Yes.
FEMALE AUDIENCE MEMBER: Will we see changes in our benefits, 401(k),
holidays, vacations, pensions, stock options.
[LAUGHTER]
D'AMELIO: [Unintelligible] holidays, floating days.
That obviously rang a bell.
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Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 17
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[LAUGHTER]
So here's what I would say, for the time being the answer is "no."
Remember what I said before, we're going to operate between now and closing as
two separate companies.
Basically when the two companies get together, we will look at, are there
things that we do that can be applied broader? Are there things they do that can
be applied broader? But, you know, one of the things we looked at as part of
diligence, was kind of overall comp, overall benefits, and although some of the
piece parts are different. You know, if you look at some of the piece parts of
different companies, European companies, versus U.S. companies, you get
differences at the sub-ledger. So you'll get differences in terms of an element
of comp, where one company may be higher than the other; but then on benefits, a
company is lower than the other.
The overall comp structure, wasn't all that different. That's how I'd
answer the question. So, for now the answer is "no," but clearly I think there
will be opportunities to leverage each others, I'll call it, "best things" in a
way that's, hopefully, beneficial to all.
And the one other point I want to make to this is, the merger aside, our
compensation structure is always being reviewed, there's always changes being
made. It's never been a constant as long as I've been with the company, and I've
been around now for a very long time. So, the fact that it's being reviewed as
there are changes being made and we're tweaking this or doing that, and geez,
that's a given. We do that
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Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 18
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all the time. We've done that all the time. We'll continue to do that. The fact
that we're merging with another company won't stop us from doing that. In fact,
it will give us an opportunity to see if there are some things we can do that
we haven't done before, and it will give them the same opportunity as well.
Yes, Denise.
DENISE: Frank, I understand it's business as usual, day-to-day operations
is a no-brainer. What about our efforts with regard to centralization,
simplification, that requires IT investments?
D'AMELIO: So that's an interesting question. I think what we need to do
is, so we start out with, we operate as a separate company, and we keep starting
out there, and that's what you drive our efforts day-to-day.
I think the one consideration there would be, say we've got a financial
system, which I know a little bit about, that we're thinking about for two to
three years out. You know, something in China, for example, which is, I'm sure,
one of the things you're thinking about in your treasury role. I think those
will be things that we need to at least just look at. But, once again, I'm very,
very cautious of, we operate as a separate company. There's actually a term that
the attorneys use to use, I don't know if Steve Reynolds is in the room, he was
telling me this over lunch, but there's a term that the attorneys use, "gun
running" I think it's called.
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Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 19
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But, what we don't want to do is in any way shape, or form, basically...
What was it?
FEMALE AUDIENCE MEMBER: [Inaudible]
D'AMELIO: "Front running?" I think he used the word "gun," but whatever it
is.
[LAUGHTER]
Maybe he used the word gun, because he was talking to me.
[LAUGHTER]
But the net of it is, we must be "squeaky clean" in terms of operating as
two separate companies. Right? We can plan, we can execute, but they'll be
certain areas like this one where I think we got to steer hard, and decide what
we want to do, which is really what you're asking me. OK? That's the best I can
do on your question. That will be on a case-by-case basis; but I understand, I
absolutely understand the issue you're raising.
Yeah, Chuck.
DAN: Frank, I have a question more on the, kind of the growth side of the
whole thing, so giving what's going on in the wider world around the Web and all
the--
D'AMELIO: Who's that, Dan in the back?
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Lucent-Alcatel Announcement
4-3-06 20
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DAN: Yeah. I was just wondering what their [?apps to this?] is like, and
where you see that headed?
D'AMELIO: Their apps business?
DAN: Yeah.
D'AMELIO: I think... So, their application's business. So the question is,
Frank, what is their applications business like? I think that's what you're
asking me, right?
DAN: [Inaudible]
D'AMELIO: Dan, what I'd like to do is let me bump it up a level, talk
about next-gen, and in particular IMS. And then as part of that, I'll talk about
apps. OK? And that will also give me an opportunity to talk about their
business. I'll do it business-by-business, and talk a little bit about what we
do that's similar, and then what they do that's a little bit different than what
we do.
So, they have a similar IMS vision to what we have. You know, kind of the
whole... What's the word? Break apart of the old circuit switching business.
Right? Separate network elements, the gateways, for signaling, for call control,
section control, and then the apps that ride on top of that. Very similar
architectural thought process. Very similar in terms of what they're doing, what
their portfolio, and how they're going to market. That would be Point 1.
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Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 21
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What's in that, they think about applications very much the way we do. In
terms of next-gen revenue opportunities. Next-gen opportunities to create value
for the company, they are very bullish on apps, and are investing on apps, and
their business is doing, I'd call it, OK, without getting into any details that
I shouldn't get into.
Similar to our applications business. Right, I mean, we kind of bundle
applications with one of our segments, and I think it's the business where we've
made some progress, but there's lots of opportunity for us, on the upside, but
same thing for them. I think they've made some good progress, so lots of
opportunity for them on the upside.
But if you think about it in that kind of our IMS, next-gen picture, a
significant opportunity for both companies, and I think leveraging them
together, you get this one plus one equals much more than two.
Now, while I'm on this, let me just spend a minute or two on how they're
organized. If you think about Lucent, we're really organized now in four
segments, there's the Mobility segment. There's multimedia networks. There's
converged core. And then there's services. And then the fifth segment is
"other," which is primarily some of the corporate center expenses and sales and
IP revenue and things like that.
If you look at how Alcatel does their external reporting, they have three
major segments, and then of course another. You need another to keep the
financial folks in business. Right, I mean everyone needs another.
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Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 22
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But if you look at the three major financial segments, their segments are:
Mobility, a Wireline, and then private networks.
Now, their Mobility and Wireline networks are very similar to ours. But
what they do in theirs that are different than ours are primarily two things.
Their services business that's attached to Mobility and Wireline, are in the
Mobility and Wireline segments. That's different than ourselves. Our services
are all part of our services segment.
And then the other big difference is, they still do their own
manufacturing. So each of those segments, their Mobility segment and their
Wireline segment, has manufacturing into those businesses. In a sense, some of
the folks that are kind of the old network system days, they look a lot like
what Network Systems use to look like years ago, when they were in a sense, the
business units were vertically integrated.
So when I had Oklahoma City, I had a general manager that ran that factor
for me, that was part of my switching business. So they look a lot like that on
manufacturing, and then they've got services integrated.
Then they also have this private network business, which is an interesting
business, which is an interesting business, there's really four sub-businesses
in that business. They have a satellite business, and if any of you have been
reading the press, there's been some activity on that satellite businesses as
you know, the [?talent?] investment that they have. You know, it's speculation
about what they want to do with their satellite business, and EADS, the European
aerodynamics and defense
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Lucent-Alcatel Announcement
4-3-06 23
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company has gotten involved. And there's lots of government folks getting
involved. The net of it is, they have a satellite business. That's my shorthand
for all that. They have a transmission signaling business, and think about
subways and railroads and kind of our E-ZPass. They don't sell the E-ZPass
device but the network that supports that is one of the businesses that they're
in. Then they do some network integration services, which is similar to ours but
they do that for some of what they call enterprise verticals -- railroad,
energy.
And in the last big business in their private networks is the enterprise
business. They still have a PBX and IP PBX business, kind of our Avaya, they
kept. So they still have that business. That private-network business is a big
business, by the way. It's almost 5 billion Euro. So a lot of big piece they
make up. That's 4 billion Euro, 5 billion US, that make up that business.
So, Dan, that's a lengthy answer to what was a short question. OK?
One last question, I've been told.
MALE AUDIENCE MEMBER: My question is about layoffs. As we've seen in the
last few weeks it's very difficult to lay off people in France, and the French
want to keep it that way. [Laughter] So this 10% that you're talking about, is
that going to be equally distributed between the companies or is 90% of it going
to come from Lucent?
D'AMELIO: Good question. I tried to cover this a little bit in my remarks.
Let me cover it again and see if I do better. At this point in time I can't look
at you and tell you in
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Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 24
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know exactly how the spread's going to take place. I'd be misleading you if I
told you that. At a macro level we did a bunch of analytics to get to the
roughly 10%.
In my mind, the way we should do this is based on, I'll call it, the
business. So what do I mean? Where the opportunities are to synergize, where the
opportunities are to be more efficient, where the opportunities are to
capitalize on savings opportunities. That's where we should basically take
actions to get the synergies. And for those of you that work with me, I always
say it's the operational actions that really generate the financial results,
right? So, you're asking me to give a financial result, but in my mind what we
need to do right is take the operational actions. If we get the operational
actions right, then the results will take care of themselves.
Now, if I had to speculate, this is a global company. This combined
company is a global company. My guess is there'll be synergies that are spread,
but in terms of what the mix will be, what the percentage will be, I can't do
that. But let me just give you some financial facts. Alcatel has 10,000
employees today in North America, 6,000 employees are in the US. They have 7,000
employees in China. Just to give you a feel for the diversity, the broad
geographic diversity of that company. So when you work in a business with
opportunities to synergize, by definition where are the opportunities? Well,
they're where the business is done and where the resources are. So you have to
believe there'll be opportunities globally relative to synergies. But in terms
of what the spread will be, I'm not prepared. It's too early.
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Frank D'Amelio
Lucent-Alcatel Announcement
4-3-06 25
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Now, the one other thing I'll say, though, is, in terms of how you get
synergies, you don't want to be taking a lot of synergies in low-cost areas. You
want to bias the higher-cost areas in terms of maximizing value, so clearly
that'll be a consideration as we work our way through the process. But really,
what'll drive it is the business decisions, and based on those business
decisions we'll see the output that'll generate the financial results. OK?
Was that the last question? Let me just spend a few minutes and wrap this
up.
Lately I can't seem to go anywhere, I can't go home, without being quizzed
on what does this all mean. My wife, who really doesn't read the business
periodicals very much has become an expert on mergers, now. [Laughter] So I get
[?challenged?] and she's teaching my kids, so I got four of them ganging up on
me now.
I think the way I'll wrap this up is with a visual. They way I think about
this is a three-legged stool. On one leg, I call it, "economically it's
overwhelmingly compelling." Write 1.7 billion in synergies in the US, most of
that within two years, so the economics are compelling.
The next leg of the stool is the strategic rationale. The strategic
rationale is compelling. All the things we're talking about are complementary,
whether it's geography, products, customers, markets -- I think it's compelling.
The third leg of the stool is emotional, and emotionally this is
gut-wrenching. By that I mean, we're merging two companies, there's many of us
who created this
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Frank D'Amelio
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company, and so emotionally it's gut-wrenching. But the economics and the
strategic rationale are overwhelming, and they're overwhelmingly positive.
So when you do something like this, it creates certain things: it creates
uncertainty, it creates challenges. Our job is to rise about that because it
creates huge opportunities. So for each of us, for every one of us individually,
this is a huge opportunity to really just hit it out of the park and demonstrate
how great a company we can be. We've done that before and I know we will do it
again. We can not leave without me giving a commercial to results, which is, the
way to start -- today is literally the beginning of Q3? -- we need to start
hitting it out of the park. It's baseball season, I'm suing baseball analogies,
right? Starting today, we've got to deliver on Q3, we've got to deliver on Q4,
we're going to have a strong remainder of the fiscal year, grow revenue, grow it
profitably, have good earnings, have good cash flow -- to me, that's the way to
demonstrate what each of us will bring to the table relative to what it just a
tremendous opportunity that we will capitalize upon.
Thank you all for your time, it's great to see you all. Let's go get 'em!
[APPLAUSE]
[END OF LUCENT-ALCATEL ANNOUNCEMENT - 4/3/06 - FRANK D'AMELIO]
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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.