Alcatel-Lucent's 'merger of equals' likely won't extend to pension assets
By Thao Hua, Pensions and Investments (London) - April 17, 2006
 
If the "merger of equals" between Alcatel SA and Lucent Technologies Inc. proceeds, Lucent most likely will retain the ability to run its pension assets independently, according to a source familiar with the deal.

The future of the $34 billion Lucent Technologies Inc. Master Pension Trust; its investment arm, Lucent Asset Management Corp.; and the approximately 40 asset managers it uses remains unclear. But a combination of corporate cultural differences, political sensitivity and various legal requirements might leave Lucent's investment staff with more autonomy than if the merger were a purely domestic deal, sources said. However, Alcatel executives might require that investments follow certain broad guidelines set by the company.

 
Alcatel and Lucent announced earlier this month that they were in the process of completing a $13.4 billion merger that would result in a trans-Atlantic telecommunications equipment provider.

"(Lucent's) pension plan is a very important part of the company; it's a significant source of its accounting income," said Tom Burnett, director of research at New York brokerage firm Wall Street Access. "For Alcatel, I don't think it matters. I don't think they're buying Lucent for (the pension plan). They're buying Lucent to enhance their presence in the U.S. and to add wireless capability, in order to provide a better balance to their revenue base."

Both Lucent Chief Executive Officer Patricia Russo and Alcatel CEO Serge Tchuruk declined to comment, citing ongoing negotiations. Lucent Asset Management President Collette Chilton could not comment, according to company spokeswoman Joan Campion. Alcatel spokesman Mark Burnworth said Alcatel pension officials declined to be interviewed.

Completely different

As businesses, Alcatel and Lucent might be a commercial match made in heaven. But their respective pension plans are worlds apart.

For starters, Lucent, based in Murray Hill, N.J., has $34 billion in defined benefit assets centrally run by its wholly owned subsidiary Lucent Asset Management. As of Sept. 30, the company's combined three pension plans - one covering management employees, the second for other U.S.-based employees, and a third for non-U.S. employees - had a $2.69 billion surplus. The overflow allowed Lucent to declare $973 million in pension benefit credits toward the company's net operating profits totaling $1.18 billion, according to the company's 2005 annual report.

Lucent's asset mix was 62% equities, 25% fixed income, 6% in real estate and 7% in private equity, according to its annual report.

Returns in fiscal year 2005, which ended Sept. 30, were 10.6%, or 2.1 percentage points above the target return of 8.5%, according to the annual report.

According to the 2006 Money Management Directory of Plan Sponsors and Tax-Exempt Funds, managers handling Lucent assets include JPMorgan Asset Management, AEW Capital Management, Dimensional Fund Advisors Inc., Barclays Global Investors, BlackRock, Pacific Investment Management Co., Putnam Investments, State Street Global Advisors, and Lord, Abbett & Co. LLC.

Paris-based Alcatel had e2.28 billion ($2.76 billion) in assets as of Dec. 31, 2005, with a e1.2 billion deficit, according to the company's annual report. Plans are managed independently across about 15 countries, each setting its own investment strategies and choosing its own asset managers.

Aggregate mix

Alcatel's aggregate asset mix is 41% bonds, 28% equities, 16% real estate and the remainder in short-term investments and cash.

In 2005, Alcatel's pension assets increased by e180 million - including employee contributions - or less than 1% from 2004. Broad guidelines for individual plans require the proportion of equities not to exceed 80% of total assets and prohibit any individual company from representing more than 5% of total equity securities within the plan, according to the annual report.

Managers for Alcatel's pension plans vary throughout the world. The Alcatel Pension Scheme, London, has a total of about %A3;175 million ($306 million) managed by Newton Investment Management Ltd., Edinburgh, and London-based Schroder Investment Management Ltd., according to the 2005 edition of Pension Funds and their Advisers

The e100 million Stichting Pensioenfonds Alcatel Nederland, Rijswijk, Netherlands, is almost entirely managed by ABN AMRO Asset Management, Amsterdam, said Gert Parlevliet, pension fund administrator. About 65% is in bonds, 30% in equities and the rest in cash. The fund decides how assets are managed independently of the parent company, Mr. Parlevliet added.

Alcatel Ireland, whose e220 million pension plan is based in Cork, uses F&C Ireland Ltd., Dublin, to manage its assets, according to the 2005 edition of Pension Funds and their Advisers.

In acquisitions involving domestic companies, the controlling party will typically look for duplications and try to achieve efficiencies by either divesting internal investment operations or merging them with existing platforms, sources said. But when the buyer is a foreign company without a significant presence in the U.S., the outcome usually leaves the seller with more independence in terms of pension management.

DaimlerChrysler comparison

The Alcatel and Lucent deal is being compared to the DaimlerChrysler AG "merger of equals," which also paired a dominant foreign buyer and a U.S. company. In that case, there was "very little change" to the day-to-day management of the $25.7 billion DaimlerChrysler Master Retirement Trust, said Jim Bante, U.S. senior manager for retirement and savings at DaimlerChrysler, Auburn Hills, Mich.

"Similarly, things didn't change in Germany. We continue to operate the plans independently," Mr. Bante said. "Compared to many other areas of company, this is probably the least integrated."

Herb Zydney, a retired Lucent executive and board member of the Lucent Retirees Organization, Inc., Cranford, N.J., also believes that the Lucent-Alcatel transaction will mirror DaimlerChrysler in the pension management aspects. But he and others in the organization, which represents about 127,000 Lucent plan participants, would like more assurance that investments will be made for their benefit rather than the combined company. The group is lobbying Congress to require that a system of independent fiduciaries be introduced as a condition of the deal.

"We have really deep questions about how investments will be made," Mr. Zydney said. "If anything, we're hoping that they will be more conservative. We think at the moment, (the investment policy) is too risky."
 

return to LRO HOME PAGE