Why Alcatel Lucent SA (ADR) Stock Dropped on News of Merger With Nokia

By Markets Fool.com

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

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What:Shares of Alcatel Lucent SA (ADR) were down about 18% near market close on Wednesday after the company announced a deal to merge withNokia .

So what: To be fair, the news wasn't exactly a surprise. Rumors of the merger surfaced on Reuters several months ago. And even after today's drop, shares of Alcatel-Lucent are still up nearly 5% over the past week -- before various reports claimed the two companies were close to coming to terms.

Speaking of which, Nokia will technically acquire Alcatel-Lucent by making an offer for all outstanding shares issued by the company through a public exchange offer in the U.S. and France. The terms of the deal apparently aren't sitting well with some ALU shareholders as shareholders will receive 0.55 of a new Nokia share for every Alcatel-Lucent share they own, which puts a value on Alcatel-Lucent of roughly 15.6 billion euros, or $16.65 billion based on today's exchange rates. Based on Nokia's closing price on Monday, that's a fully diluted premium of 35% (EUR 4.48 per share), and a premium to shareholders of 28% (EUR 4.27 per share) on the unaffected weighted average share price of Alcatel-Lucent for the previous three months.

Now what:The combined companies will form a veritable European telecommunications giant, with both companies noting they have "highly complementary portfolios and geographies, with particular strength in the United States, China, Europe, and Asia-Pacific." According to Alcatel, the new company will also "be in a position to accelerate development of future technologies including 5G, IP and software-defined network, cloud, analytics as well as sensors and imaging."

As it stands, the transaction is expected to close in the first half of 2016 and will be subject to regulatory approval. In the meantime, we shouldn't forget Alcatel's price will be tied largely to that of Nokia. For now, and keeping in mind the potential down the road for Alcatel and Nokia to do great things together to advance next-gen technology, I'm content watching this story unfold from the sidelines.

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The article Why Alcatel Lucent SA (ADR) Stock Dropped on News of Merger With Nokia originally appeared on Fool.com.

Steve Symington has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.