Alcatel SA is due to meet with senior executives from the former dot-com era star Lucent Technology later this week to further discuss the possibility of a merger between the two telecom giants, the company announced on Monday.

Although the deal is largely seen as a defensive move, since telecom giants have been under pressure over the last decade with the arrival of VOIP and increasing competition brought about by de-regulation, analysts think the combination would make a great deal. "They go together like chocolate and peanut butter," said analyst Paul Sagawa of Sanford C. Bernstein & Co. LLC, according to a report by Chron.com.

Although Alcatel's share price is about 40% higher than Lucent's, the potential deal is still being billed as a merger, confirming previous speculation by a minority of powerful Wall Street analysts' speculation that the telecom's giant is vastly undervalued. In a research note published yesterday Lehman Brothers analyst Jiong Shao re-iterated his "overweight" forecast for Lucent equity, citing the increasing likelihood of IMS contract wins at Verizon later this year. The combined Alcatel-Lucent would be the first pan-American European telecom company to have significant contracts in place with major companies on both sides of the Atlantic.

The trans-Atlantic deal is fraught with complexities, however, not least because it may raise potentially large security issues for the U.S. government. Because of Alcatel's higher valuation, the deal is being seen by government officials as a takeover rather than a merger, comprising confidential national security information which Lucent may be privy to. "With a long history of contributing to military efforts like ballistic missile technology and submarine sonar, the famed Bell Labs unit of Lucent is widely expected to become a focal point when the deal is presented to regulators in Washington for approval," wrote Vikas Bajaj and Andrew Ross Sorkin in the New York Times today.