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The following is a transcript of a conference call held on April 4, 2006
between certain executives of Lucent Technologies Inc. and employees of Lucent
Technologies Inc.
All-Employee Broadcast
April 4, 2006 1
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[BEGINNING OF ALL-EMPLOYEE BROADCAST -- PAT RUSSO -- 4/4/06]
CONFERENCE FACILITATOR: Live from Murray Hill, New Jersey it's the Lucent
Technologies All Employee Broadcast for Tuesday, April 4th, 2006. And now here's
Mary Lou Ambrus.
MARY LOU AMBRUS: Welcome, everyone, good morning, good afternoon, good
evening. I know everyone's anxious to get started. And in a minute we'll have
Pat come up. But before we get going, I just want to remind you. We'll have
plenty of time for questions. So if you would like to ask a question on the
line, hit star (*) one (1), and the operator will get you in queue. And here in
the room, put your hand up. We'll bring a microphone to you. And to call in
questions, try 908-582-2138, and we'll try to get to as many of your questions
as possible. We're going to get started this morning. We have a short video clip
that really summarizes the historic news over the last 48 hours so let's roll
the clip.
[BEGINNING OF VIDEO]
FEMALE SPEAKER: France's Alcatel and New Jersey based Lucent technologies
are combining in a $13.4 billion deal. The merger will create possibly the
largest telecom company in the world.
MALE SPEAKER: Lucent chief, Pat Russo, is going to become CEO of the new
entity with combined revenues of 25 billion.
FEMALE SPEAKER: The new company surpasses Ericsson and challenges Cisco
for the top spot in the phone and web equipment market.
PAT RUSSO: This is truly a defining moment in our industry, for our
company, for our customers and for our people.
MALE SPEAKER: It is a merger of equals. It will be a split towards risk
management, 60/40 split in terms of which shareowners own the combined entity.
MALE SPEAKER: Essentially, these companies match up like chocolate and
peanut butter where Lucent's strong, Alcatel's weak. Where Alcatel's strong,
Lucent's weak. But their geographic strengths are different. And, frankly, I
mean I think it's a perfect jigsaw puzzle. They go right together. In a product
portfolio, they also have GSM and UMTS wireless assets that Alcatel and Lucent
is number one in the world and CDMA. So it makes a very formidable global
carrier.
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MALE SPEAKER: They want to be the first out there, choose their partner
first, choose the best partner that fits with them and be out there and be the
largest company, have the most scale and the most breadths across those
geographies as well as R&D.
MALE SPEAKER: The telecom market is in better shape than it was in the
last couple years. The outlook is more positive.
[END OF VIDEO]
PAT RUSSO: I see we have standing room only here. I apologize if I sound a
little nasally. I've been fighting a bit of a cold. Thanks for joining us and
hello to all of you here in New Jersey and all around the world. And I should
just start by reiterating something I said yesterday. I do think this is a
defining moment in our industry, and I think it's a defining moment for our
company. I hadn't seen the video clip that the PR team pulled together. But if
you just reflect on some of the points that were made, it really does speak to
what it is we're doing and why we're doing it.
Let me tell you how I'd like to spend our time this morning because I
think there's an awful lot of excitement about what we have the potential to
create here. And I'll talk about that. And I also recognize that along with that
excitement, once you get through the powerful statements about largest player,
largest competitor and all the wonderful, exciting things, you can quickly get
to what does this mean for me, and I want to also spend some time talking about
that.
I don't have any charts or any slides. I really just want to talk to you,
and I want to talk about a couple things. I want to talk about why are we
merging. So you hear from me what it is that I think you need to understand
about why we're merging, why we're merging now and why we're looking at this
combination or why we're merging with Alcatel. Then I want to talk a little bit
about making sure you all understand how we structured this transaction. And the
reason is because there's been a lot written. There will be a lot written.
There's a lot of interpretation. People will take one signal here or one signal
there and translate it into something that has meaning when it doesn't. And so I
really want to articulate how we structure this and why we structured it the way
we have. And then I want to talk a bit about how I would ask you to think about
it in the context of those things. And then I'll try to do that fairly quickly
because I really want to spend the bulk of our time really talking to you about
the things that are on your mind and trying to answer your questions. And I'm
sure you must have a gazillion, some of which we'll be able to answer and some
of which we won't.
First of all, let me just talk about why. If you look at our industry,
think about three things: consolidation, competition and convergence. And if you
look at what's happening with our customers, there's clearly consolidation
that's been going on all over the world. It's likely to continue. Our customers
are looking for their suppliers to be suppliers of significant size and scale,
how we're going to be able to bring them a full panoply of end-to-end solutions
with the financial capacity and the investment capacity to continue to innovate,
which is becoming increasingly important in this industry if you think about
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April 4, 2006 3
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what's happening to our customers. So the whole consolidation theme is one that
has many tentacles, including the implications, obviously, for those of us who
are suppliers to our customers.
From a competitive standpoint, you all know and see what's happening
everyday, that the landscape, that the competitive landscape, is only
intensifying. Size and scale and financial capacity really matter in this
industry. It matters to be able to have thousands and thousands and thousands of
engineers who can innovate and who can develop. It matters to have global scale
and scope when you look at where the opportunities are around the world. So from
a competitive landscape standpoint, this is an opportunity to create, as you
heard others say, the number one truly global player in the industry.
And then thirdly, why Lucent and Alcatel? If you look at, first of all,
this relationship as many of you recall, goes back to 2001. It wasn't an
accident in 2001 that we were talking to each other due to the strength and
assets of each company, due to the complementarity that exists in both of those
companies. So if you look at the assets of Alcatel and the assets of Lucent,
while there are clearly some areas that overlap, there is no question. It's
actually quite a complimentary fit. It's relatively complimentary from a product
standpoint. Alcatel is not in the CDMA business. We are not in the GSM business.
So the combination of their assets and our assets makes us a number two, number
two in the world in mobility. Alcatel is very strong as you all know in the
wireline business. We, obviously, had good strength in that area. The
combination is clear unequivocal, number one, in that arena. We have tremendous
strength in IMS and next generation networking. We got out ahead of that as you
all know, leveraging our wireless and our wireline capability. Alcatel has come
at that from a bit of a different direction so when you look at the market, you
look at it from the emerging market to the high end of the market. There's
actually a nice opportunity for us to leverage our assets. It doesn't mean there
won't be some rationalization that has to be done, but our participation in that
space is not as directly overlapping as one might think because of how each of
us has come at that.
From a services standpoint, they have a very large services business.
They're structured a bit differently than we are. We have a large services
business. As a matter of strategy, we both see the need in the industry, the
intensification of interest in and need for integration services, network
consulting services, professional services, along with the traditional
deployment, installation, maintenance, including multivendor maintenance
services. So when you bring these two companies together, you have the number
two player in services in the world. So when you step back and you ask yourself
what are the ingredients, the assets, the capabilities that are absolutely key
to be a leader in next generation network, we will be in combination, number one
or number two, in every one of the areas that matters. I think that's incredibly
compelling from a market positioning and customer capability standpoint.
When you look at the geographic complementarity, 66% of our business is in
North America. Almost 50% of their business is in Europe. When you put our
businesses together, you have a geographic profile that companies who truly want
to be
All-Employee Broadcast
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global in this space can only dream about. You have about a third of your
business in North America, you have a third of your business in Europe, and you
have about a third of your business in Asia/Pacific, China, the Middle East and
the Caribbean/Latin American region. So, again, a geographic footprint that
looks as much like the market as any company in our industry. So the geographic
complementarity is strong as well.
And then when you take a step back and say what kind of value can you
create, a couple of points I would make here. I have not talked to a customer
who has not been supportive of the need for consolidation. In fact, I probably
have been asked as many times as not when are the suppliers going to
consolidate. And the reason customers have been asking us about that is because
as they get bigger, as they face the need for more intense competition, they
want to know that their partners are big and global and have the capacity to
invest along with them. I recall one conversation with a CEO of a very large
company here in the U.S., who I won't specifically name, but he got very engaged
with me about how important R&D capacity is and how important innovation is from
his standpoint in order for him to be able to compete. So tremendous capability
there.
And then if you look at it from a shareholder value creation standpoint,
and I know Frank talked about this yesterday when he took you through the
messaging that we've been doing. It is absolutely compelling. There is no
question. It is compelling. We can create much more value together for our
customers, for our shareowners and ultimately for our employees I believe over
time, than either one of us can do alone. So a little bit about why.
Consolidation, competition, convergence, a little bit about why Lucent and
Alcatel.
Let me also talk about, speak a little bit to the convergence team as
well. You know our industry is at the beginning phases of the next wave of
technology deployment and adoption with respect to all IP networks. So from a
time standpoint, the sooner the better you can bring these assets together and
lay out your roadmaps and your plans for customers before that evolution gets
too far down the path. So that's a very practical aspect of this.
Secondly, we really are making the first move in the industry. And I do
believe there is a first move advantage. You get to pick your partner. You get
to determine whether you have a common vision. You get to be the changers of the
landscape while others end up looking around and saying, OK, who's left and how
might this work. So from a timing standpoint, I think it's also important to
reflect on and think about the first move advantage.
That's a little bit about the logic. And I know most of you must have seen
the presentation so I really don't want to reiterate that.
Let me say a little bit about how we structured this transaction because
it's important to understand, and you will read different things. You know I saw
in the
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European press Alcatel's acquiring Lucent. And so you may see that, or you may
hear people say that. That is factually not correct although some might
interpret that.
Let me tell you how we structured this and why we structured it the way we
have. And I think it's just important context for you because as you then move
to well, how are decisions going to be made about structure and organization and
people. It's important to know how we structured this transaction. And it is
very different than an acquisition.
So let me describe an acquisition. An acquisition would be a company much
larger than us acquires us. When they acquire us, they pay a premium to our
shareowners in order to gain control of the company. Control of the company
means you control the board, and you control management. That's what an
acquisition really is. I mean it's as simple as that. Frank, did I miss
anything? So you acquire, you buy a company for a premium in exchange for
control. And let me make one other point. There have been acquisitions that have
been called merger of equals. And they have been viewed to have failed as merger
of equals because they never really were a merger of equals. They were
acquisition masquerading as mergers of equals. And I just think it's important
to know that. I won't go into which one, but you all read the press. What we
structured, and I'll tell you why we structured it this way, was a true merger
of equals. And in a merger of equals, you have to think about two dimensions.
There's valuation, and there's management and governance.
From a valuation standpoint, Alcatel is a larger company than our by about
40 to 50% in terms of revenue. So they are bigger than we are. And, therefore,
they are valued higher than we are. So when you structure a merger of equals,
you care for the relative size and value of the company in the ultimate
ownership of the new company. And so some of you may have read the new combined
company will be 60% owned by Alcatel shareowners and 40% owned by Lucent
shareowners, and that is how you reflect the size and value differences. That's
valuation.
From a management standpoint, we have structured this as a merger of
equals, meaning sharing control, sharing control from a board governance and
from a management standpoint. So what we said was, in fact, you've all seen
this, obviously Serge Tchuruk, who is the chairman and CEO of Alcatel will
become the non-executive chairman. A non-executive chairman is just that. They
are non-executive, meaning they chair the board, they care for board agendas,
they do not engage in the operational decisions or running of the business.
That's the purview as it is here in the U.S. model of the CEO. I will be in that
position.
From a board standpoint, we will be forming what's called the split board
which means half of the board members will come from Lucent, half of the board
members will come from Alcatel. We will add two new independent board members.
The good thing about that by the way is, is we've studied other combinations.
The sooner you can get some people on your board who have no history with either
of the original companies but are just focused on the new company, it tends to
help the board evolve more rapidly. So two new independent board members. We've
agreed that they will be
All-Employee Broadcast
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European board members because we want to reflect the global nature of the
company when you look at the aggregate board profile. So that's the structure
from a governance standpoint. I think it's about as perfect from a true merger
of equal standpoint as one could structure in this kind of a transaction.
And then lastly, from a management standpoint, we will have, we've agreed,
we've got tremendous talent in both companies. And we've agreed that we will
have a management team which, by the way, has really not been announced yet.
We've announced some positions. But there's a whole lot of key leadership
positions, senior leadership positions, that are yet to be announced along with
the organizational structure. And we said we would be best in balance. That's
how we've articulated. So that's a little bit about the structure.
Let me take it now to how you should think about this. And because I know
and I talked to folks here yesterday, and I know you quickly get to well, what
does this mean. What does it mean to the organization? What does it mean to me?
Obviously, I can't do anything other than to communicated with you to assuage
what I'm sure is uncertainty about what this means with respect to organizations
and people. I would be disingenuous if I tried to do that. What I can tell you
is that you ought to reserve judgment about what all this means until we're in a
position to communicate more proactively with you about how we plan to
transition and how we plan to integrate. So what do I mean by that? Just because
executive offices are in Paris doesn't mean all corporate functions will be in
Paris. So those are the kinds of things that I just want you all to kind of take
a step back from and recognize this combined company is a truly global company.
We will have over 30,000 people in North America, 10,000 people in China, tens
of thousands of people in Europe, headquarters of businesses in many places,
including the U.S. and Europe and China and California.
And so this company, as I vision, this will be a very global company that
will have to learn to work somewhat virtually. We are not going to have all
functions and all resources in one place including in the concept of
headquarters. That's point one.
Point two, what will be very important in the combination of this company
is a blending, is a true blending of perspective, knowledge, experience, know
how of both companies. So as we think about any particular function, whether
it's finance, whether it's law, whether it's marketing, whether it's strategy,
whether it's the wireline business, a blending of the businesses, a blending of
the talent, a blending of the experience, will be very important in order for us
to really make this a success.
So I just wanted to share a little bit of that with you so as you think
about how might this thing evolve into a forward, that's some context for you
that perhaps you didn't have if you just read. If you just read, here's what we
announced, and here's where this is, you can draw conclusions. And my only
request of you is don't jump too quickly to a conclusion about what the answer
may be because there's some things you may be missing as you do that.
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So let me stop there and really just open it up for things you want to
talk about. Frank, come on up because Frank's been, as you might imagine, very
heavily involved, as have Cindy and Janet and John and others in the work we've
done up to this point. Frank will play an absolutely critical role making sure
that we fulfill on the promise of this combination as well as run a big piece of
the operation. So let's just talk about the things that are on your mind. Frank,
did I leave anything else that I should have said?
FRANK D'AMELIO: No. In terms of the structure of the deal, just some
simple math to help you with how some of those numbers get calculated. When the
stock prices closed on Friday, Alcatel was trading at 15.40. We were trading at
like 3.05, 3.06. So the math that people do--
CONFERENCE FACILITATOR: As a reminder, if you have a question from the
phone lines, please press star (*) then the number one (1) 1 on your telephone
keypad. Again, if you have a question or comment, please press star (*) then the
number one (1) 1.
D'AMELIO: --952 and say, well, gees, were you under water? Was it below
market deal by about a nickel? And the answer is no. Because the deal, the sixth
exchange ratio wasn't based on the closing price as of Friday. It was based on a
period, an interval, kind of a period before that. And then there was an
interval when the stock prices didn't matter which was give or take a short
period in between when the deal was announced and when that period ended.
So there's math that goes on which kind of explains some of the comments
people are making about below market, above market. Look at it this way. Before
the deal, before Alcatel and ourselves commented on the price on the fact that
we were in negotiation, our stock was 2.82. Then if you do the calculation based
on a 2.82, and then put that over 15.40, you get a much different kind of
exchange ratio. It's lower than the 19.52. So I'm just trying to give you a feel
for some of the math and how people are commenting on the exchange ratio.
AMBRUS: We have many, many, many questions. One of the ones I want to
start with because I've gotten a lot already, is around the whole issue of Bell
Labs, Pat. Are we going to divide any part of Bell Labs and move it to France?
What does it mean for the work we're doing with the U.S. government? Will we get
resistance from the U.S. government for the work that Bell Labs does, and how
are we going to manage that? A lot of concern.
RUSSO: First of all, Bell Labs, the headquarters of Bell Labs, what Bell
Labs is remains unchanged. In fact, my hope is that we are able to expand what
Bell Labs is and looks like around the world from a research standpoint.
Alcatel, of course, and again, when you get involved in these kinds of
discussions, you are always reminded of the pride that each company has in its
heritage and its identity and its business as Alcatel has, Alcatel research and
innovation. And they have core research that they do, and they have research
centers around the world. And, of course, we have Bell Labs,
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and you all are familiar with that. So I vision that this is an opportunity to
do more from a research standpoint together than either of us could do
separately. But make no mistake, we have no intention of dividing up Bell Labs,
moving Bell Labs or not having Bell Labs be headquartered exactly where it is.
With respect to the sensitive U.S. government work, we have arranged for a
structure that is a separate U.S. subsidiary headed by a proxy board. We made an
announcement yesterday with three outstanding individuals that have already
agreed. Jung has done a phenomenal job here. Three outstanding, impressive
individuals who have agreed to serve on the proxy board, that's a very typical
mechanism used when you have a combination of U.S. and non U.S. interests
associated with a company. So that's our plan, and we believe that that's a plan
that's workable. It works in other cases for other companies, and we have every
expectation that it will work here.
Now, obviously, we have to get approvals. In fact, I'm leaving right from
here to go down to D.C. I have a string of folks to talk to on the Hill who all
have an interest in this, and so I'll be doing that until tonight I guess. Did I
answer all those.
AMBRUS: Yes. Before we go to the room, just one other. As you can well
imagine, multiple, multiple questions around head count. And really what it gets
down to, Pat, is how can you take a fair and balanced approach when you consider
the fact that it's almost impossible to lay anyone off in France? What if the
majority of the 8800 job cuts have to come from Lucent? And what I might
suggest, Pat, is you might reflect on the conversation we had with the employees
of Alcatel yesterday about their concern, from that side of the transaction.
RUSSO: Your concern stems from the chair you sit in and who you're talking
to. It was interesting. I'll give you a little bit of this color. I had an
opportunity to meet with a hundred Alcatel folks while we were between press
conference and industry analyst conference. And their concerns came up very
quickly. And, obviously, their concerns stem from the fact that I'm the CEO. And
so they look at things we've done, and the fact that I'm an American and said
are you going to get out of the enterprise business because you got out of your
enterprise business. Are you going to divest certain things? Are you going to
move functions to New Jersey that are here? So just as we think about from this
side all the things that could happen, there's a whole another group of people
over there saying we don't know her. She's American. And what decisions will she
make that are going to affect my life? So I just give you that in terms of a
little color. It was interesting because they were very quick to raise the
concerns they had about things I might do that would impact them.
AMBRUS: I'm going to just add. And who is she? What is your management
style? I think almost every question came down to what can we expect of the
kinds of decision that a Pat Russo is going to have because their chairman is
beloved to them.
RUSSO: Now having said that--
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D'AMELIO: By the way, Pat told them we weren't moving any functions to
Murray Hill, New Jersey. We were going to move functions to Hoboken.
RUSSO: So the question about it's impossible to cut jobs in France, I
would say that's absolutely flat out not correct. If you look at the reductions
that Alcatel has taken as a company and the number of jobs they've reduce in
France, I would venture to say it's probably equal to what we've done as a
company.
Now the processes are a bit more rigorous, and it may take a little bit
longer. But nobody should conclude that we will make our decisions based on
do-ability. We're going to make the decisions based on what's in the long-term
best interests of the company because there really isn't a country in this world
that you can't reduce jobs. It's just a matter of how long does it take and what
do you have to do to do it. So concluding that all the reductions will come from
Lucent is flat out wrong. And concluding that there can't be any reductions in
countries where it's tougher, is also flat out wrong.
D'AMELIO: Mary Lou, and just remember Alcatel has many people outside of
France. They have 10,000 employees in North America, 6,000 employees in the U.S.
So they are very much a global company with people global all over the world.
RUSSO: I think they have 28% of their people are in France and 72% are in
other countries of the world. So I got into this discussion. Two things I will
tell you for color in case you didn't see it. I'd been asked a lot of questions
about the notion of a French company. And I keep getting people to think of this
is really a very global company. In fact, Alcatel has many of its business
headquarters not in France. Their optical business is in Italy. Their fixed
business is in Belgium. Their IT business is in California. Their North American
business in Dallas So there's lots of places where they have resources who are
part of "what they think of as headquarters."
Secondly, Serge was asked a question yesterday on the analyst call about
how does it feel being the national champion. And his response was national
champion of what? We're not the national champion of anything. And the reference
was being made to well, you know France and Alcatel. He said, look, we're a
global company. We happen to have our headquarters here because we're
incorporated in France. But we are a global company, and he goes out of his way
to remind people about that because when you look at the facts and the numbers,
they truly are a very global company. It's just important to keep in mind. When
you think about it to Frank's point, where all the people are. They really are
all over the world in both of our cases. You know 40% of our people are outside,
40 almost now up to 50% maybe outside the U.S.
AMBRUS: I'd like to go to a question on the phone. We have a phone-in
question from Whippany.
CONFERENCE FACILITATOR: You have Jay from Whippany.
JAY -- of Whippany: Pat, my question would things still remain the same
with LRE service and also will Alcatel honor the remaining of the CWA contract?
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D'AMELIO: I think the short answer to the question, put the first part of
the question aside. In terms of the CWA contract, the answer is the contract as
is continues. I mean that's really the short answer to the question. And you
asked about the CWA. I want to just broaden it and say that answer applies to
the CWA and the IBEW. So the contract we have now continues to apply between now
and signing or closure. And then once we close, those contracts stay in effect.
So the answer is those contracts will continue to stay in effect.
In terms of service levels, I don't see any changes in service levels.
There is clearly going to be rationalization work that will need to be done
across all functions that will include facilities. So there will be word
rationalization work that needs to be done. But in terms of service levels, I
don't see any major changes to service levels at this point.
JAY -- of Whippany: Thank you.
AMBRUS: Do we have any questions in the room? Put your hand up and they'll
bring the mike for you. Right up here in the back.
MALE AUDIENCE MEMBER: My question is about Lucent retirees. I mean they're
an affected party in this transaction. And my question is do you have a plan to
communicate like in a meeting or a series of meetings, e-mail or paper
communications with the Lucent retirees to answer their questions about how
their benefits and security will be affected?
RUSSO: First of all, obviously they are absolutely a constituent. I think
that's very important to call that out. And, yes, we will be communicating
likely via the typical letter, website, those kinds of things, would be probably
the better course of communications. And I spent some time in the presentations
I did yesterday making sure everyone understood from a pension standpoint, our
pensions are adequately funded. Nothing changes with regard to pension benefits
or the pension plans or the responsibilities we have in that regard will
continue to be overseen from a U.S. ERISA law standpoint. So if you take a step
back from a retiree standpoint, one could look at this and say, I am the retiree
of a company that will be becoming larger with greater scale, greater scope,
greater ability to compete and greater financial capability, just as sort of a
general matter. From a pension standpoint, nothing really changes.
And then from a retiree health standpoint, the issue of retiree health is
an issue that has to do with rising costs of health care and what's affordable.
And just as we have said that we have to look at what the costs are, balanced in
a way with what's affordable, we will continue to have to do that. So from my
standpoint, there really is not a change other than the fact that this company
will be part of a larger combined company that's got more scale, more breadth
and more capacity.
D'AMELIO: And just to add to what Pat said. The new company, Pat said it
really well in her comments. We can do things together that we can't do on our
own. That includes that 1.7 billion of synergies, U.S. dollars. Financial
success in a company
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benefits all constituents of the company. So it benefits our shareholders, our
bond holders, our customers, our employees, our retirees, all constituents. So
we are positioning ourselves for what I'll call extreme financial success, and
all constituents of the company benefit when a company is successful
financially.
RUSSO: That's the breakpoint.
AMBRUS: Any other questions? One on the aisle over here.
MALE AUDIENCE MEMBER: My question is on revenue and financial
improvements. With a broader product portfolio and resources now available with
the merged company, how do you see that impact on revenue growth going forward
compared to the single digit growth that we've experienced in the past?
D'AMELIO: So we haven't made any projections about revenue growth. And
given that we're in kind of a quiet period, I have to be real careful with
numbers. But if I tell you the answer, I'd have to kill you. I'm just kidding.
Here's the way to think about it. The 1.7 billion that I just alluded to
has no assumptions on revenue synergies. That is entirely a cost synergy number.
There is clearly lots of opportunity for each of us to pull through each other
products, point one. I mean they do certain things like in their enterprise
business, for example, where they have a strong enterprise business outside of
the U.S. and are very much trying to create a good enterprise business in the
U.S. I think there's things we can do, for example, there to help them. If you
look at the embedded bases that both companies have, whether it's wireline,
whether it's mobility, our joint capabilities now to roll those embedded bases.
As we move to 3G and mobility, for example, where they have a huge DSM embedded
base. Clearly, it's an opportunity for additional revenue upside.
So the opportunities based on geographic footprint, on customer reach, on
the embedded base that these two companies have for increased revenue growth is
clearly significant. And we assumed none of that, none of that in the synergies
that we communicated over the last couple of days. So clearly significant
upside.
And then in terms of what percentages that translates to, the answer is
more than what we've been generating I think as our own company. It's clear the
ability to generate more revenue.
AMBRUS: We have a caller on the line from California. Maybe not. We'll get
back to the caller on the line from California. Pat, a couple questions on what
are the hurdles and milestones in order to complete the acquisition. And is
there any possibility that this may not get to completion?
RUSSO: You have the classic approval process with respect to the
regulatory authority. That would be the U.S. regulatory authority, the European
union regulatory authority. We will go through a [?sifius?] which is a process
here in the U.S. that we'll look at foreign investment in a U.S. company. We
will go through the typical antitrust that Hart, Scott, Rodino reviews that will
look to see whether there's any antitrust
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considerations here. And so a set of things that will happen we. We will work.
I mean our objective is to get to closure as quickly as possible. We said six
to 12 months. Six is better than 12. That's a function of all the filings and
all the work that our teams will have to do in terms of getting this approval.
I'm not anticipating based upon what we've looked at that there's an antitrust
issue, an anti-competitiveness issue. But that's for the regulatory authorities
to decide, and we'll do everything we can to get through those hurdles
successfully. I think the proactive step we took with respect to the formation
of the subsidiary and the leadership of the members that we named, I think will
help. It can only help in working through the Washington review of this. So
those are some of the hurdles.
Now what we've got to do, obviously, while that's going on, is we've got
to begin to do transition planning and distinguish, obviously, planning from
execution. It would be my goal that we do as much planning as we can between now
and close with a planning team, by the way, full time. And then on the day we
close, we're really ready to start executing and implementing the integration
plan. That would be ideal where there's clarity around who's in what job, who's
in charge, what are the things that have to be done. That's what you'd like to
do. So we will have a set of milestones along the way from a planning standpoint
to get us up to closing and then we will have yet another set of critical
integration milestones that we'll all be running against as we actually are a
combine company.
AMBRUS: Any questions in the room?
RUSSO: One minor detail. Our shareowners need to approve this. So we will
have to call a shareowners' meeting, and we will have to present the case and
let the shareowners vote on this transaction as will Alcatel. So we both have to
go through shareholder votes. Thank you for reminding me.
AMBRUS: I know there's a question in the back. Before we get to the
question in the back of the room, Pat, I have a lot, a lot of questions around
concerns on benefits. How can my pension be secure if Alcatel is a foreign
company? How do I know that there will be a pension? What does it mean to my
401(k)? What does it mean to our employee stock options?
RUSSO: I want Frank to explain. Let me say this. And Bill Carappezzi and
Frank and Mark Gibbon are probably more the experts on this. When you look at
these kinds of combinations, there is a whole host of legal, financial
structuring that goes on with parent companies and subsidiaries and a whole set
of things we will not take you through, that cares for these kinds of things. So
(a) you just need to know that. Having said that, let me know, let Frank take a
crack at dealing with... Or Bill or Mark, if you want to jump in on the terms of
the structure around pension.
D'AMELIO: Bill, what I'm going to do is just at a high level talk about
the new legal structure of the company. And, by the way cause--
RUSSO: Can we do that?
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D'AMELIO: Yes. There's been lots of folks that have been working on that.
Bill Carapezzi, Mark Gibbons, John Krismacher, myself, Chris McCarthy, from a
tax perspective, lots of people from all over the organization. But, I mean, at
a macro level, put the pension aside for a minute, I'll come back to it, when
you merge companies, you want to make sure you maximize every element of value
creation. So one of the things that we've been getting asked, for example, is
why France? Just to start at a macro level. The reason we chose France is where
we wanted the company to be "incorporated," is because it maximizes our tax
value. We, both companies, have significant deferred tax assets, significant
NOLs, and it just turns out, when you look at the various tax laws of the
different countries, France was the most favorable for the combined companies.
So to just give you a feel for some of the things that we've been looking at,
relative to this kind of an issue.
So now, let's get to the pension. The pension obligations of Lucent, will
continue to remain with what I'll call, the U.S. entity, that is currently
Lucent. That legal entity will remain. Those obligations will remain part of
that legal entity.
Now, I want to just connect some dots. Pat talks about that separate sub
that we're creating for some of our government business. Think about the Lucent
legal entity as it exists today, we're going to drop a sub, visually, right off
of that legal entity, but it's part of the Lucent U.S. parent entity today. That
parent entity is what will continue to own the obligation of our pension and the
like.
So, there's a whole lot more that goes with that. Alcatels clearly putting
an entity in the U.S., that will be part of our U.S. entity. But the real U.S.
entity will be the Lucent legal entity as we know it today. And then they'll be
some other entity to get established as well.
So, from a pension perspective, really, the obligation to those
pensioners, remains the same, it's that same legal entity that exists today.
That's the way to think about it.
Bill, did I miss anything? And we intend to honor that obligation. Right.
RUSSO: The other thing, I think it's important to know is, regardless of
where a company is incorporated... right, you think about a lot of
pharmaceutical companies that have consolidated, that's an industry that I think
is a good example of cost border consolidation, Glaxso, Smith Kline,
Astrozenica, Sinafee Aventis, Pharmacia and Upjohn, and just a whole host of
pharmaceutical consolidations between U.S. companies and European companies.
What's important to know is, regardless of where the actual parent
incorporation of a company is, the company, the subsidiary, in the operations of
those companies, have to abide by the laws of the companies in which they're
doing business. OK, so it's just another dimension of this with respect to
incorporated in France, U.S. subsidiaries, U.S. laws governing U.S. pension
plans. All of those things remain in effect, in terms of the need for compliance
and being governed and guided by.
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What did we miss on that?
FEMALE SPEAKER: No, you got it.
RUSSO: We got it? OK.
FEMALE SPEAKER: Yes.
JOHN: Frank, I was just... you talked about the liability sense with
the... you talked about the liability staying with the legal entity in the U.S.,
we should also talk about the asset-side of the equation.
RUSSO: Yes.
JOHN: Right? The assets--
RUSSO: Yes, good point, John.
JOHN: Which are very important, right? You want to ensure that the assets
are protected for the benefit of the retirees. The assets in support of these
plans are held in trust for the benefit of the plan participants, and that
doesn't change. And, there's no access for someone to come in and strip out the
assets that support these liabilities. The remaining trust on the after the plan
participants.
RUSSO: Yeah, thank you, John.
D'AMELIO: Very good point.
RUSSO: Great point.
D'AMELIO: And the assets exceed the liabilities, which is always a good
directionally correct thing.
RUSSO: And then, I'm sorry, and then I think I remember something on
auction.
AMBRUS: Yes, [?Pat's?] option.
RUSSO: So, the plan here... keep me honest, guys, John and... there will
be a convergence as this deal closes, options in Lucent will be converted into
the security of the new combined company, and all the exchange ratios, etc.,
that affect that. Is that right, John?
JOHN: Yes.
AMBRUS: Do we have a question in the back of the room?
FEMALE AUDIENCE MEMBER: Frank and Pat, a question, this has been
positioned, as you indicated, a merger of equals. Where we're weak, they're
strong, and vice, versa. And as you go through the integration and all the work
that you have to do
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between now and close, what's the biggest challenge? Or do you even see a
concern as you're going through the integration and a process to get us to the
clues?
And the second piece of that is as you're going along, are you going to be
in a quiet period, or how much are you going to be communicating to the
employees, or how frequently will we know where we are in the process of going
towards the close?
RUSSO: OK. Did you say what are the concerns?
This is a massive job of integrating two companies. OK, so when I think
about what weight do we now carry around, it's... You know, we are two very
large global companies, and we have a lot of work to do to get these companies
combined, and it will take, even after close, you know, it will take awhile
before you're truly integrated as one company. Right? You know that. So our
expectations shouldn't be, Day 1, everything is integrated, systems are
integrated. It generally doesn't work that way. So, in terms of a concern, we
have a lot of work to do.
OK, now, having said that, I've seen what the people in this company, and
I think the Alcatel folks would tell you, what they've done, as we've weathered
the storm and made the changes we've made. I mean we've gone through radical
change, as a company, both since our birth, as Lucent. Right? With a big run-up
in the industry, and then all the change we've gone through. I think we have
incredibly smart people. Incredibly dedicated people. So, are we up to the task?
We're absolutely up to the task. There's no question in my mind. And from what I
observed, at least, either directly or second hand, from the work that went on
by the senior leaders who got together in advance of this, the ability to
communicate with each other, understand each other, collaborate around what's
going on in the industry, and reach a good business decision, I have confidence
we'll be able to do that. Right? I have confidence we'll be able to do that.
It's just the sheet magnitude of all of the things that have to be cared for.
And, you know, in fact, as Frank and I were talking about, kind of
integration and operations, and you think about all kinds, you know, real
estate, information systems, how we do supply chain, how they do supply chain. I
mean, there's just... you know, every function of every company. So, we have a
lot of work to do. We're up to it. We just need to plan for it and manager it
well. We're going to need to be guided. You know, my next step, and Frank and I
talked about this, I need some guidance from our outside advisers around how to
do transition planning, within what's allowable, and then how do you communicate
along the way? So, I don't know exactly yet, what we're going to be able to do
by when, but by next week I will. Believe me, we just need a little bit of time
here to get the kind of advice and guidance around. We've never done this
before. So, how do you manage these? And we'll go the full on companies that
have done it well, and companies that have not done it well. And I think there
re some good examples.
D'AMELIO: Two other comment, if I may Mary Lou. One is, at least, the
assumption out of the shoot is we can plan and plan and plan, we just can't
implement the plans. And then the attorneys would tell us whether we have to
pull back on that a little bit.
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But I want to just come back to the question, Karen, which is, what are we
most concerned about? Let me tell you what I'm most concerned about. Even
despite that massive effort that we got to do on integration, we're still two
separate companies.
RUSSO: Yeah, a great point!
D'AMELIO: We have to execute flawlessly, our own plans, and between now
and when this deal closes. So what does that mean? Today's April the 4th, you
know, we're right at the beginning of Q3. We need to have a terrific Q3, and
then we need to have a terrific Q4. As a company we didn't have a terrific Q1.
Right? And we're going to report-out on Q2 in a couple of weeks, so I can't
comment on that.
But, what's most incumbent upon us right now is, to deliver on our plan.
To delver on the Q3 plan. To deliver on the Q4 plan. Because we want to make
sure we show strong over the remainder of the fiscal year, regardless of what
we're doing on the merger-side.
RUSSO: Yeah, that is a great point, and I was going to get there. We got
to execute our plan as they exist. And, 99% of the people in the company need to
be doing that, while we have a transition planning team working on... you know,
reaching into the organization as appropriate, but we've got to keep separate
running and executing our business from planning for this transaction. That, I
think, will give us the greatest chance of near-term success, which we need --
and then longer term success, which obviously we expect. But we got to stay
focused on our plans at-hand, and execute on them.
AMBRUS: The only thing I'd add to that, Pat and Frank, is we've set up on
our internal website a spot where we're getting information on whatever we have,
in terms of updates, around the merger announcement. So continue to check there,
we'll work with our legal colleagues on what we can put there, but we'll be
communicating for sure through that website with any updates, as we go through
this process.
Do we have any other questions in the room? One in the back.
FEMALE AUDIENCE MEMBER: Hi. My question is related to internal controls
and operations. And I'd like to know if you can share with us what ERP systems
are used at Alcatel to manage their internal business operations? And also if
they support an insource or outsource model? And if there are any controls or
regulations used or required, similar to what we do in the U.S., in support of
Sarbanes-Oxley?
D'AMELIO: I can do this, and then if I miss anything, there's lots of
folks in the room that'll help me. So in terms of their model on insourcing or
outsourcing, for the most part -- I'm assuming you mean manufacturing -- for the
most part, they do their own manufacturing. So that's one of the areas where we
have different business models. Most of our manufacturing, in fact almost all of
our manufacturing, is outsourced. And now primarily with two manufacturers, two
EMSs, where most of their manufacturing is done by their own factories. So
that's clearly an area where we'll have to work our way through what's the right
model.
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And by the way, on many of these I always say, we shouldn't get caught up
in an 'or'. In many of these, the answer may be an 'and'. It doesn't have to be
insourcing or outsourcing, it could be insourcing and outsourcing. It turns out,
they get some interesting benefits from having their own manufacturing that we
haven't had access to.
So what do I mean? Because they have a lot of their own local content, in
places like France, Germany and China, they get access to some export financing
that we haven't been able to get access to for customer financing. So there's
some interesting benefits from their model that we'll obviously need to study as
we work our way forward. Point One.
Point Two, on the whole governance model relative to 404 and Sarbanes, we
had a thorough, exhaustive due diligence effort that was led by folks, many of
whom in this room -- Bill Carapezzi and his team, very much involved -- and we
are comfortable with what I'll call clearly our governance model. And then as we
merge, I'll call it coming together of our model with what they're doing in this
area.
So we are comfortable with, through our diligence process, through many
discussions with their senior folks in this area, what we do today, what they do
today, and then how it'll come together post-merger.
And then in terms of their systems, they clearly have a systems
environment that's good, but like ours, can be improved. They use, they have
aspects of SAP, they have MFG PRO, so they have some systems very similar to
some of the things we do. But systems in general, for both companies, I think,
are clearly an area of opportunity as we go forward.
AMBRUS: Thanks, Frank. We probably have time for one more question,
because Pat does have to leave to go to Washington. But I know Rebecca has
someone up on the aisle.
FEMALE AUDIENCE MEMBER: Hi. I know back in 2001, I believe it's in August,
we started negotiations with Alcatel, right? And I'd like to know what [?failed
then?], and what changed in subsequent years, besides the obvious growth of both
companies? In terms of your negotiation strategy, what made you feel this time
around it could be successful?
RUSSO: That's a great question. I wasn't here in 2001, I think it was May,
actually. I'm not suggesting that made the difference.
[LAUGHTER]
[APPLAUSE]
I only said that because I'm not sure I'm as credible to answer the
question as you might like, so I'll defer to Frank, who was here.
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[LAUGHTER]
I will tell you what Serge said yesterday -- where's John DeBono? -- when
asked. And John was trying to figure out if this was a French name, a French
translation of an English name. What Serge said was, "They mayonnaise just
didn't stick."
[LAUGHTER]
And so John was wondering if that was really chemistry or something,
right? But I'll... my view is, it just wasn't right. Things didn't come to
closure in a way that both sides felt good about. And in the end, that's what
you need to do. When you put a deal like this together, it's a matter of what
are you willing to compromise, what are you willing not to compromise? How
compelling is the vision and the opportunity? And that really informs your
ability to get something done.
I will tell you, and then I'll let Frank go back five years, I think I
have a very good working relationship with Serge. I have great respect for him;
he's tremendously admired by the people of Alcatel, he's a straight-up guy. He
unfortunately was going to be here, but can't. He has a family matter he's
dealing with, and so he regretted not being able to be here. But I think if you
got to know him, you'd like him.
And so I think we have good chemistry, and I think we reached an agreement
that's compelled by the possibilities we can create together, and we were able
to work out the things that were important from our side and from their side.
D'AMELIO: Just two quick comments. I think one is, no fine wine should be
consumed before its time.
[LAUGHTER]
I think the fine wine wasn't ready to be consumed back in 2001. And then I
think in terms of--
RUSSO: [unintelligible] have time to think about [unintelligible]
D'AMELIO: I got to play off the mayonnaise answer.
[LAUGHTER]
And then two, you all have heard me talk about our continuum as a company,
about survive, stabilize, thrive. Back then, the whole industry, including both
companies, was very much in what I'll call survival mode. And we got into
philosophical differences about where each company was respectively on that
continuum. And those philosophical differences drove some, I'll call it heated
negotiations, relative to the merger agreement, that wound up not getting done.
So I think it was nothing more than the timing wasn't right.
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AMBRUS: OK. Pat, one other question, before we wrap up. Because I know
this is on a lot of people's minds, will we get a brand-new name? Is it going to
be a combination of the current names? And how are we going to go about this
process?
RUSSO: I could share with you some funny e-mails I've gotten...
[LAUGHTER]
Alcasys, Lucatel, for example. Here's what we said. We will determine what
the name is at a later date. You shouldn't conclude from that it won't be some
combination of names today, or that it will in fact be a new name. I think we
have some work to do to look at what's the brand equity. Because both companies
have equity in the brand around the world. They do vary, by the way. There are
parts of the world where Alcatel's brand equity is stronger than ours because
they do business much more significantly in a part of the world than we do, and
vice versa.
What we have said is, it won't be one or the other, so it won't be
either/or. It will be something that is either a combination or a new name, and
that'll really be informed by what's the cost of creating new equity, versus the
value of leveraging current equity? And we've got some more work to do. I do
know that Bell Labs, and the name Bell Labs, Bell Labs Innovation, or Bell Labs
Research and Innovation, clearly has value, and I would expect we're going to
continue to want to find a way to obviously leverage that. But again, we haven't
drawn any decisions on that. And then we'll have to determine from that, do we
change the [?Tucks stop ticker?] or not, etc.? So those are things to come.
AMBRUS: Do you want to wrap up?
RUSSO: I just... I hope this has been helpful, at least in terms of -- I
see some heads nodding -- I hope it's been helpful to give you all a bit of, not
just all the great positive things about the combination, because you've been
hearing a lot about that. And the external reaction I think substantiates the
significance of this, defining aspects that this creates in the industry. So I
didn't spend a lot of time there.
But I hope it was helpful in giving you a bit more color, so you can think
about what are the implications of this potentially, with a bit more light than
perhaps you've been able to glean by just reading things or interpreting. In the
end, though, I'd ask as we go forward, please stay focused on executing the
plans we have for 2006. We really need to deliver and demonstrate that on our
own we can meet our expectations and do what's expected of us.
And at the same time, as you look forward, think about the power of what
we have the opportunity to create, with the first largest, truly global player
in the industry, that with a portfolio that would be absolutely best-in-class,
in terms of breadth and scale, financial resources and capabilities beyond what
either of us could have alone, a breadth of talent and assets, intellectual
property assets, engineering assets, all around the world, a geographic
footprint that looks like the global market. I could go on and on; it is
compelling.
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And from my standpoint, I think for all of us as we go forward, while we
will go through a rationalization, this is my view about accelerating our growth
and our possibilities in the market. That's what it's really ultimately about,
because that's where the long-term value will really come from.
So thanks for your interest, thanks for your patience, and let's go
forward and stay focused.
AMBRUS: Thanks, Pat.
[APPLAUSE]
[END OF ALL-EMPLOYEE BROADCAST -- PAT RUSSO -- 4/4/06]
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.