Cramer Considers Lucent's Fate
By James J. Cramer
1/8/00 12:37 PM ET
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Is Lucent (LU:NYSE - news) the next IBM (IBM:NYSE - news) or the next Digital Equipment? I found myself asking that question right after Herb Greenberg and Joe Battipaglia finished their fiery exchange on our fabulous weekend show. (And if you didn't think this one was fabulous, may I suggest that you watch a half-hour of any competitive business program this weekend? I mean, even the execs in nonbusiness TV-land know this is a great show.)
This dichotomy pretty much says it all. Digital Equipment was once a great company, but it started getting its lunch eaten by rivals just as is now happening to Lucent. Management refused to change. Good people left. And once it hit that wall -- that $200 wall if anyone else remembers -- it never recovered. It preannounced just as Lucent did and from then on you needed to be short it. In fact, only after the Compaq (CPQ:NYSE - news) bid did it have a serious uptick. It became what we in the profession call a "lifetime short."
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Ah, but the opposite occurred with IBM. Through force of leadership and rapid change, IBM pulled out of its tailspin and reinvented itself. It took stock of how it was getting beaten and adjusted its game plan. It became a great long again. I still think it is.
Which is it going to be? Herb talked about how short-sellers are still circling, betting nothing is going to change and that the spiral has just begun. That's the Digital Equipment bet. Joe Battipaglia said that there is so much good stuff inside this company and it's so in the sweet spot that if it adjusts it will come right back. That's the IBM bet.
Here's where I come out. It is up to the head honcho, Rich McGinn. If he treats this as a one-time glitch this company is dead. Its legacy software business is dying. The central switch biz ain't so hot. The hot areas, the Ascend-like areas (Lucent bought Ascend), are being poached by smart start-ups and many of the good people at Ascend have left. The optical area, so strong, is getting its clock cleaned by competitors, something admitted on the conference call. Things really need a shake-up and these accounting gimmicks masked the problems for only so long. That's over.
If McGinn relaxes now that the quarter is botched, this company will be another Digital Equipment and Herb's short-selling sources will be right. Joe will be right if Rich, and in our business he is Rich to everyone, continues his style of being open and honest and tough about what went wrong. Remember, he did not blame others or the environment for the company's shortcomings. He told the truth, even though it hurt much more than the fiction most CEOs spin when things go awry.
To continue to stay short it is to bet you already know the answer to this unanswerable question. To stay long seems equally as foolish to me, because you don't know if the tough steps will be taken.
I think both positions commit the sin of arrogance. Sometimes the sidelines rule. This is one of those times
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