Alcatel and Lucent have confirmed that the two companies are to merge.
The alliance stands to create a networking giant with revenue of €21 billion, based on 2005 financial results, and a strong presence in each continent.
"We are very excited about this combination," said Patricia Russo, chairman and CEO of Lucent. "We see this as an opportunity to create a clear, competitive advantage in the marketplace."
The announcement comes a week after the two companies said they were talking about a merger. Analysts speculated that growing competition from Chinese networking vendors like Huawei Technologies and ZTE had pushed the two companies to consider a union.
"Now seems to be the optimal time because this combination gives both companies a time-to-market advantage in a market that is changing quickly," said Serge Tchuruk, Alcatel's chairman and CEO.
The companies are a good fit geographically, the executives said. Alcatel made about half of its sales in Europe in 2005, while Lucent made about two thirds of its sales in North America. Combined, the new company would have made 35 percent of sales in Europe, 34 percent in North America and 31 percent in the rest of the world.
The combined company would see pre-tax cost savings of around €1.4 billion per year by the third year of operations, Russo said.
About 10 percent of the new company's workforce, which stood at about 88,000 at the beginning of the year, would likely lose their jobs as a result of the merger, she said.
Under the terms of the agreement Lucent shareholders will receive 0.1952 of an ADS (American Depositary Share) representing ordinary shares of Alcatel for every common share of Lucent that they own, the companies said. After the merger, Alcatel shareholders will hold about 60 percent of the new company, with Lucent shareholders accounting for the remaining 40 percent.
The new company will be based in Paris and headed by Lucent's Russo. The board of directors will consist of Russo, Alcatel's Tchuruk, five other people from each company and two independent European directors.
Also planned is a separate company to handle Lucent's business with the US government. That company will be managed by a three-person board made up of US citizens, said Russo.
The merger has been agreed to by the boards of directors of both companies, but also requires approval from shareholders and regulatory authorities. The companies said they anticipate the deal will close in six months to a year.
The two companies have been close to merger before.
"Five years ago we went a very long way to get this done and discussion broke in the last minutes," said Tchuruk.
The companies never disclosed the exact reason why the talks failed, although reports at the time suggested it was because Lucent had insisted on a merger of equals, with both sides having an equal number of representatives on the combined company's board of directors - something that was agreed to with Sunday's deal.