Institutional Shareholder Services, the influential US shareholder advisory firm, has recommended shareholders approve the $10.4bn acquisition of Lucent Technologies by Alcatel, the French telecoms equipment maker.

The recommendation comes as Alcatel begins canvassing support for the share-swap deal against the backdrop of a sharp drop in both companies’ stock prices and negative comments from some analysts.

Shareholders are due to vote on the deal, announced in April, on September 7.

“Although some degree of scepticism is warranted when evaluating any so-called merger of equals and the slide in share price of both Lucent and Alcatel is cause for concern, we believe the proposed transaction warrants Lucent and Alcatel shareholder support,” ISS said.

Under the terms of the deal, Alcatel agreed to pay Lucent shareholders 0.1952 American Depositary Shares in Alcatel for each Lucent share.

However, Lucent has since announced disappointing financial results, including a nearly 80 per cent drop in third-quarter profits, leading some investors to question whether Alcatel might be overpaying for its US rival. The slide in both companies’ share price has pushed the value of the deal down about 23 per cent.

One analyst, Per Lindberg of Dresdner Kleinwort, has questioned the terms of the merger and raised concern about Lucent’s pension liabilities. He also warned that Alcatel could face trouble running Lucent’s Bell Labs arm, which does sensitive research for the government. Lucent and Alcatel have firmly dismissed these concerns.

Lucent filed a formal notice to the Committee on Foreign Investment in the US seeking approval for its acquisition by Alcatel this week because of its Bell labs division. The committee must approve foreign acquisitions of US companies.

ISS said on Thursday that despite some doubts, it supports the deal based on the “compelling strategic rationale, attractive synergies and conservation valuation.” he global telecommunications equipment market has become increasingly competitive reflecting the consolidation trend among network operators and the convergence of voice and data services.

Since the Alcatel-Lucent deal was unveiled, Siemens of Germany and Finland’s Nokia have agreed to combine their telecoms networks businesses and their has been continuing speculation about possible industry partnerships involving perhaps Canada’s Nortel or Motorola of the US.

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