It looks like a terrible time to invest in Lucent Technologies. The stock fell 6.0% on Tuesday, to $2.19, after the telecommunications-equipment giant disclosed that revenues for the current fiscal year would be lower than expected. Lucent said it expects sales of $2.04 billion for the quarter that ended June 30; analysts, on average, had previously been forecasting $2.34 billion. It's the second time this year the Murray Hill, N.J., company warned of a sales slowdown. The culprits this time around were lower sales of wireless equipment to North America and an overall sales drop in China.
Despite the dampened prospects, Citigroup analyst B. Alexander Henderson upgraded the stock to buy from hold. The reason for his bullishness has as much to do with French telecom-gear producer Alcatel as it does with Lucent.
In April, Lucent (symbol LU) said it would merge with Alcatel in an all-stock deal. Lucent shareholders will receive a 0.1952 share of Alcatel for every one share of Lucent. The American depositary receipts of Paris-based Alcatel (ALA) closed Tuesday at $11.71, down 4.8% after Lucent's sales warning. If the merger where to happen today, Lucent investors would receive Alcatel stock worth about $2.30 per Lucent share. That's a 5% premium over Lucent's current price.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
But Henderson thinks Alcatel ADRs are worth $17 based on the potential of the combined company to achieve the scale necessary to thrive in a fiercely competitive industry. If Alcatel shares were to hit that target, Lucent investors would receive Alcatel stock worth about $3.30 per Lucent share -- a 50% gain from today's price (but nowhere near the $84 that Lucent shares fetched in 1999).
This type of investing, known as merger arbitrage, is risky. The success of a merger investment depends on whether the deal is completed. If a deal fails to close, the stock of the takeover target can plunge. On Monday, Lucent and Alcatel announced that they plan to consummate the deal by the end of the year. Lucent shareholders can only hope that's true.
-
Rally Fades on Mixed AI Revolution News: Stock Market TodayAll three main U.S. equity indexes opened higher but closed lower as a seven-session winning streak for the S&P 500 came to an end.
-
Stretch Your Holiday Shopping Budget Further with These Under-$50 Gifts That Don't Feel CheapAmazon October Prime Day is the perfect chance to nab some under-$50 gifts that feel more expensive than they are (because normally they would be).
-
If You'd Put $1,000 Into Bank of America Stock 20 Years Ago, Here's What You'd Have TodayBank of America stock has been a massive buy-and-hold bust.
-
If You'd Put $1,000 Into Oracle Stock 20 Years Ago, Here's What You'd Have TodayORCL Oracle stock has been an outstanding buy-and-hold bet for decades.
-
How to Invest for Rising Data Integrity RiskAmid a broad assault on venerable institutions, President Trump has targeted agencies responsible for data critical to markets. How should investors respond?
-
If You'd Put $1,000 Into Sherwin-Williams Stock 20 Years Ago, Here's What You'd Have TodaySherwin-Williams stock has clobbered the broader market by a wide margin for a long time.
-
If You'd Put $1,000 Into UnitedHealth Group Stock 20 Years Ago, Here's What You'd Have TodayUNH stock was a massive market beater for ages — until it wasn't.
-
What Tariffs Mean for Your Sector ExposureNew, higher and changing tariffs will ripple through the economy and into share prices for many quarters to come.
-
How to Invest for a Fall Interest Rate Cut by the FedA lot can happen between now and then, but the probability the Fed cuts interest rates in September is back above 80%.
-
Are Buffett and Berkshire About to Bail on Kraft Heinz Stock?Warren Buffett and Berkshire Hathaway own a lot of Kraft Heinz stock, so what happens when they decide to sell KHC?
