Alcatel and Lucent in £19bn merger talks

The deal, described as a merger of equals, would produce a combined company with sales of £15bn, enabling it to leapfrog Ericsson of Sweden and the market leader, Cisco Systems.

The two companies attempted to merge five years ago but talks broke down after Lucent baulked at the prospect of being swallowed up by its bigger rival.

If the latest talks succeed, it would be a fitting swansong for Alcatel's 68-year-old chief executive Serge Tchuruk, who retires in three months. It could also solve the problem of who is to succeed him, as Lucent's chief executive, Pat Russo, could step into the role of running the enlarged company.

In a brief statement to the markets yesterday, Alcatel and Lucent said they were holding discussions about "a potential merger of equals intended to be priced at the market" - in effect, a nil-premium merger. Advisers said the deal was likely to involve Alcatel making an offer for Lucent using its own shares. Alcatel trades at a much higher premium than Lucent and is worth half as much again as its smaller US rival.

The announcement of the talks lifted shares in both companies, with Alcatel rising 2 per cent and Lucent gaining more than 10 per cent, helping it close the valuation gap slightly.

A merger of the two would produce cost savings. It would also create a dominant equipment supplier able to match the clout of the big telecoms companies who are themselves increasing in scale through takeover deals.

It would also mark a change of strategy for Alcatel, which had been linked to a possible merger with Thales, the French defence electronics group in which it already holds a 9.5 per cent stake. Another rumoured takeover candidate for Alcatel has been the French media technology group Thomson.

Alcatel is the world's biggest manufacturer of broadband internet equipment and is strong in Europe. Lucent has tended to concentrate more on old-technology voice telephony networks. This makes its revenues more vulnerable, hence the disparity in valuations.

A deal would follow a series of earlier tie-ups between equipment suppliers. In November, Cisco paid $7bn (£4bn) for Scientific-Atlanta, while this week, Lucent outbid Ericsson to acquire Riverstone Networks, a bankrupt manufacturer of network routers, for $207m.

The statement from Alcatel and Lucent cautioned that there could be no assurance of completing a transaction. The two companies refused to comment further until either an agreement was reached or the talks broke off.