Thread ---Lucent Technologies Inc.
Dow Jones Newswires -- July 2, 1999
SMARTMONEY.COM:Lucent:Still Hungry After All
These Deals
By Alec Appelbaum
SmartMoney.Com
NEW YORK (Dow Jones)--Sometimes a stock becomes proxy for an entire industry. The old
AT&T (T) did this for phones, while Microsoft (MSFT) represented software for a while. On
Monday, Lucent Technologies (LU) completed its purchase of Ascend Communications, a leading
vendor of switching equipment for high-speed Internet data. At a shindig in California, 2930 miles
from Lucent's New Jersey headquarters, Lucent audaciously declared itself the world leader in
communications networking. But CEO Rich McGinn has some more shopping to do before Lucent
becomes the essential networking stock. Lucent dominated phone equipment sales, both as part of
AT&T and in the three years since its independence, by selling nuts and bolts to big carriers. Those
carriers, from AT&T down to scrappy competitors, still represent huge orders. But since the Internet
has made high-speed data transmission so important to all kinds of industries, carriers are diving into
the realm of "managed services," customizing networks to suit business customers' individual needs.
So an equipment supplier must have a full arsenal of goods in its warehouse for anything these
customers might decide they need. "Lucent wants to be a full-service provider for both" carriers and
the businesses they serve, says Lee Doyle, an analyst with International Data Corporation (IDC). In
the past, Lucent would have just built any specialty its customers demanded at its legendary Bell Labs
division, which invented everything from the touch tone to call waiting. But the competitive clock runs
too fast for that now. "They have to be on their toes and come to market very quickly," says Christin
Flynn, a hardware analyst with market research firm The Yankee Group. "There are a lot of startups
developing these products, and in some sense it's less expensive for Lucent to just go out and buy
them." True enough. With a market capitalization of $180 billion, Lucent has plenty of currency for
acquisitions to expand its self-computed 7% share of the worldwide communications business. But
who could it buy? We went snooping and came up with three product areas the company might want
to fill out as it seeks to knock rivals like Cisco Systems (CSCO) and Nortel Networks (NT) off their
perches. One important piece it doesn't own is integrated access devices, which take any form of
communication and translate it into digital bits that can travel over a high-speed network.
The Yankee Group's Flynn notes that Lucent's traditional phone company customers and Ascend's
customers are trying to help businesses replace old-fashioned networks with digital ones.
They might reward Lucent for owning the hottest technology. On Monday, Lucent expanded its
reseller agreement with Vina, a private venture-funded operation that makes especially fast integrated
access models. Who else is out there? Flynn cites profitable Adtran (ADTN), penny-stock Verilink
(VRLK) and large, beleaguered Newbridge Networks (NN). Lucent would control its costs and
pricing more surely if it bought one of them for the right price. The same goes for a piece of
equipment known as access routers. "None of Ascend's equipment would help routing needs," says
Flynn. Many of Lucent's smaller buys over the past year have given it equipment that connects to the
router in a business network. IDC's Doyle says Lucent's recent purchase of Nexabit Networks
addresses "high-end" customers in this area, while an internally developed product called PacketStar
aims for a broader audience. Doug Ruby, chief technology officer of Lucent's InterNetworking
division, says this product is Lucent's second-biggest seller to businesses. But it's probably a distant
second. And if big orders don't speed up for the PacketStar in the next year, Ruby's boss might
break out his checkbook.
The market is thin. Giga Information Group analyst Jim Slaby says Cisco has 70% of the
Internet-enabled router market; Nortel and Siemens bought access-router specialists earlier this year.
Redback Networks (RBAK) remains independent, but its shares, trading 421% above their May 18
offering price, might not be easy for McGinn to swallow. Smaller players include Brooktrout
Technologies (BRKT) and private firms like Xedia. Lucent is also fiercely proud of its technical
innovations in voice-over-Internet systems, and it's spent billions on software to help customers
manage the change from one kind of network to another. For that reason, Lucent seems disinclined
to make a play for 3Com (COMS) or Cabletron Systems (CS), two large firms that have lots of
customers but lots of what one industry analyst calls 'garbage." Lucent's appetite for garbage is
probably nil, but its appetite for new customers is growing. As Doyle points out, its "old buddies" at
AT&T will spend heavily on upgrading cable systems for voice and Internet service in the next couple
of years. With a relatively "weak" cable product line, Doyle says, the company might snatch
promising cable-equipment specialists such as Com21 (CMTO) or Terayon (TERN), which are
cheaper and simpler than 3Com. Credit Suisse First Boston analyst Jim Parmelee, who reinstated
coverage on Lucent Wednesday, says the firm's marketing alliance with Motorola (MOT),
announced two weeks ago, is the first salvo in a longer cable campaign. Ruby, himself a prize from an
early Lucent acquisition, mostly wants to talk about beating Cisco. "If a customer is really open to
making a purchase decision, we have a very good product" for networking voice and data, he insists.
And with customers? appetite for new gear growing, a few more very good products could make
Lucent the king of the networking hill.
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