The combined company, to be based in Paris, expects annual sales of $25 billion - close to the 2005 revenue posted by top telcom equipment maker Cisco Systems Inc - and generate $1.7 billion of savings within three years, the companies said.

The companies said the savings would come from several areas, including consolidating support functions, leveraging research and development and services across a larger base and cutting about 10% of their combined worldwide work force.

As of December 31, the companies had about 88,000 employees in total.

Alcatel said it agreed to buy Lucent to better combat the intense competition in the telecom equipment market.

Terms

The combined company, whose name is to be decided at a later date, will be led by Patricia Russo, the current chief executive of Lucent, the companies said in a joint statement.

Serge Tchuruk, Alcatel chairman and CEO, will become non-executive chairman.

The 14-member board of directors will include Russo, Tchuruk, five of the current directors from each company and two new independent European directors to be mutually agreed upon, the companies said.

Under the terms of the transaction approved by the boards of each company, Alcatel shareholders will hold about 60% of the new company and Lucent shareholders about 40%.

Alcatel and Lucent announced on March 23 that they were negotiating a "merger of equals".

Paris-based Alcatel has more revenue and employees, but Lucent, based in Murray Hill, New Jersey, is slightly more profitable.