The talks are a repeat of the negotiations between the two companies in 2001 when they failed to reach an agreement because of Lucent’s insistence that it should be a merger of equals with top jobs shared out between the two companies.

A brief statement on Friday said they are now discussing a potential merger of equals that is intended to be priced at market. Neither company was willing to clarify the curiously worded statement.

Even after its share price rose 9.22% to $3.08 on the news Friday, Lucent’s market value of $13.77bn trailed far behind the $20.2bn valuation of Alcatel. Nor does the recent performance of the two companies point to anything like equality in performance. Alcatel posted net income of $1.1bn on revenue 7.3% higher at $15.7bn in 2005, while Lucent made net income of $1.18bn on revenue of $9.4bn. Moreover, while Alcatel is forecasting revenue growth in the mid-single-digit range for the full year 2006, Lucent predicts growth in the year will be essentially flat or an increase in the low-single digits.

Under these circumstances, merger of equals appears to be a phrase to spare Lucent’s feelings as an under-performing company. The reference to priced at market suggests that any deal will reflect their market valuation and that Alcatel is unwilling to pay a premium for the company.

The logic of the deal remains the same as in the previous talks. Lucent derives 63% of its revenue from the US while 42% of Alcatel’s revenue comes from western Europe and only 15% from North America. Moreover, Lucent is dependent on a few massive customers. Verizon and Verizon Wireless together accounted for approximately 28% of its revenue in 2005.

The $67bn acquisition of BellSouth Corp by AT&T Inc announced earlier this month is not only an indication of the massive purchasing power that will squeeze prices among equipment suppliers, but also suggests a bleak future for those companies that miss out on orders from the large service providers that account for 75% of global carrier spending. The rapid emergence of companies such as Huawei Technologies Co Ltd with low cost R&D and manufacturing facilities in China will add the growing commoditization of equipment.

Lucent will bring Alcatel useful expertise in the CDMA wireless market although Verizon Wireless and Sprint combined accounted for 63% of the $4.6bn revenue from its mobility activities last year. Its integrated network solutions division, which sells mainly to the large established service providers, was the company’s weak point, and revenue last year fell 13% to $2.6bn. Managed services have been a big target area for equipment suppliers because they offer a predictable form of revenue running operations for their customers. While service revenues rose 10.5% to $2.1bn last year, the 25 customers using Lucent for managed services did not contribute a significant proportion of this total.

By contrast, while Alcatel’s fixed communication business showed only 1.7% revenue growth to 5.1bn euros ($6.1bn) last year, strength in DSL helped it to record a fourth quarter sales rise of 12.3%. On the mobile side, Alcatel enjoyed 21% revenue growth to 4bn euros ($4.8bn) but this is area where it needs Lucent’s operations to give it scale.

The problem area for integrating the two companies will be jobs. Alcatel has a 56,000-strong workforce compared to the 30,500 employed by Lucent. Big cut-backs would be inevitable to drive costs from the combined business, but this would be a big problem for Paris, France-based Alcatel, where jobs are a sensitive issue. By contrast, Lucent has reduced its workforce by 16,500 since 2002.

If the merger goes ahead, it will leave Nortel Networks Corp looking vulnerable. The company is only just emerging from a huge revenue-recognition problem, and its likely 2005 revenue of $11.1bn would be dwarfed by the $25bn of a combined Alcatel and Lucent.

LM Ericsson Telefon AB is also anxious to expand, and having acquired struggling UK carrier Marconi, has been mentioned as a possible partner for Siemens networking operations.