Lucent, Alcatel seen getting U.S. security nod
Mon Apr 3, 2006 3:43 AM IST162

By Jeremy Pelofsky and Jim Wolf

WASHINGTON (Reuters) - Lucent Technologies Inc. will likely win approval from U.S. national security officials to be acquired by Alcatel if the companies can live with government security conditions, experts said on Sunday.

As part of Alcatel's $13.4 billion acquisition, Lucent said it would create a separate unit that would run some sensitive U.S. government contracts, a common practice with classified work done by foreign companies.

Exactly what will go into that subsidiary is likely to be open for debate and review by the Committee on Foreign Investment in the United States (CFIUS), which must clear foreign acquisitions of U.S. companies.

"This subsidiary would be separately managed by a board composed of three U.S. citizens acceptable to the U.S. government," Lucent Chief Executive Patricia Russo said on a conference call with investors and reporters.

The plan to set up the unit was seen as an attempt to head off potential security concerns about a foreign firm acquiring a U.S. company that makes sensitive equipment used by the U.S. government, an issue at the forefront in the wake of an Arab company trying to acquire operations at U.S. ports.

Dubai Ports World, owned by the Arab government of Dubai, earlier this year gave up plans to manage six U.S. ports it acquired from a British company after pressure from lawmakers who blasted the deal as weakening U.S. national security.

Lucent has a wide array of sensitive government contracts, including one for an advanced communications system for the Defense Advanced Research Projects Agency, the Pentagon's technology incubator, and the company also does work on laser communications, secure wireless systems and network security.

FOCUS ON SENSITIVE WORK

For CFIUS, the key question will be "whether the U.S. government is comfortable having Alcatel own a majority stake of a company with these types of sensitive contracts, even under a proxy arrangement," said Jeffrey Bialos, a lawyer who presided over industrial affairs at the Pentagon during the Clinton administration.

Lucent is home to the celebrated Bell Labs, birthplace of everything from the fax machine and the transistor to lasers and communications satellites.

There was a "good chance" the U.S. government would approve the proposed transatlantic tie-up, partly because of the widespread availability of telecommunications technology, but anything involving encryption or communications security likely would have to be walled off under a proxy board, Bialos said.

"It's likely they will find some way of getting to 'yes'," he said.

Since word emerged that Alcatel and Lucent were weighing a deal, lawmakers have kept mostly silent. Spokesmen for Democratic Sens. Charles Schumer of New York and Robert Menendez of New Jersey, outspoken against the Dubai deal, were not immediately available for comment on Sunday.

"I don't think there's any rational reason for anyone to oppose this deal," said Stephen Kamman, an analyst with CIBC World Markets. "It doesn't mean that this deal doesn't become a political football."

One complication could also be the fact that Caisse des Depots et Consignations, a French state-owned financial institution, holds about 4.12 percent of Alcatel and 4.22 percent in voting rights, according to a securities filing.

Bialos said the French government stake could draw particular security scrutiny from the Defense Department. Foreign government ownership was a key factor that sunk the Dubai Ports World deal.

One lawyer who has represented companies in CFIUS reviews said the focus in the Lucent deal could also center on non-classified but sensitive contracts and research and development projects.

They could be required to screen employees, regularly provide information to the U.S. government or completely separate that work into the separate U.S. subsidiary, the lawyer said, speaking on the condition of anonymity.

"In this (political) environment, CFIUS people are being extraordinarily cautious," the lawyer said.

(Additional reporting by Jessica Hall in Philadelphia.)

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