Luther --
Could you or anyone comment on the following reference to TYC from the LU thread?
It was my understanding from last quarter's conference call that the new cable deployments would fit seamlessly into current customers needs, and in addition not alter existing terrestrial connections....not providing opportunities as the following analyst suggests.
>>>>>>
Lucent Gets Ready to Jump Into Undersea Cable Business
<Picture>By Scott Moritz
Staff Reporter
3/23/00 2:57 PM ET
Don't hold your breath just yet, but growth-hungry Lucent (LU:NYSE) looks ready to make a splash.
The supplier of telecom equipment is in talks with undersea network operator Global Crossing (GBLX:Nasdaq) to provide optical switching and amplifiers for new submarine cables, say people familiar with the companies. Though negotiations are ongoing, these people say an agreement on a multiyear contract worth as much as $500 million may be reached in the next few weeks. Lucent declined to comment on the talks, and Global Crossing didn't immediately return calls seeking comment.
Analysts point to the possible underwater deal as a sign of a coming tidal wave: They say Lucent could be ready to capture a big share of the fast-growing undersea market, as ballooning global Internet traffic spurs carriers to build more submarine routes. That could accelerate growth at Lucent and give it a leg up on competitors in what has been a bottleneck for communications traffic.
Under Water
A lead in a hot area could do wonders for Lucent shares. Investors have spurned the stock since a January earnings warning knocked a third off Lucent's market value and raised questions about its execution amid cutthroat competition. Lucent won some detractors back with a March 1 plan to unload slow-growth businesses, but its stock remains down for the year and more than 25% off its 52-week high, despite the frothy market for telecom-equipment shares.
Even in the aftermath of that plan, doubts about Lucent's financial health persist. Lucent weakened Wednesday amid rumors that it was having another weak quarter, though the stock bounced back Thursday after a weak start. A Lucent spokesman calls the rumors unfounded and says there are no plans to change guidance for the fiscal second quarter.
Yet as the stock's value falls, John Hancock Global Technology fund co-manager Marc Klee says Lucent, which is currently valued just above $200 billion, only becomes more attractive. "This is exactly what Lucent needs," says Klee, who doesn't hold Lucent shares: "Proof that it's starting to participate in areas with good growth."
Prime Time
Flux in the undersea business represents a prime opportunity for Lucent, says Wit SoundView's Truc Do, who has been one of the first analysts to herald the coming buildup of submarine bandwidth.
Do notes that the leading supplier to the industry, Tyco International's (TYC:NYSE) TyCom subsidiary, is shifting its focus toward laying its own undersea cable systems. So outfits like Global Crossing need new vendors, says Do, who has a buy on Lucent and whose firm has no banking ties.
Further, neither Cisco (CSCO:Nasdaq) nor Nortel (NT:NYSE) has built much of an undersea equipment business. So without Tyco, the rest of the field is limited to Lucent, Alcatel (ALA:NYSE ADR) and Japan's KDD. That means Lucent could inherit much of Tyco's submarine equipment business at a time of furious demand.
Puny Pipes
Also playing to Lucent's advantage: Undersea pipes are relatively puny. Advances in laser splitting and optical switching have torqued up overland fiber bandwidth, making ocean routes the real bottleneck in global Internet traffic. So analysts say Lucent has a major opportunity to sell advanced gear to a slew of next-generation undersea cablers.
"The time is coming where these undersea systems need to support much more sophisticated capabilities," says Sanford Bernstein analyst Paul Sagawa, who has an outperform rating on Lucent, his highest rating. Bernstein has no banking ties to these companies.
And experience shouldn't be a problem. As the research arm of AT&T (T:NYSE), Lucent predecessor Bell Labs was a leader in undersea equipment development for AT&T Submarine Systems division, which was sold to Tyco three years ago.
Home by the Sea
Despite the opportunity, it's not clear that the sunken treasure will go to Lucent. For one thing, a multiyear deal worth less than $500 million in itself means little to a company that reported revenue of $38.3 billion for the year ended Dec. 31. That in a business that's susceptible to wild boom-bust swings, according to Lisa Pierce, an analyst with Giga Information Group. "This is not something you can count on for a continuing source of revenue and profit," says Pierce, whose firm consults for all the major telecommunications outfits.
For another, some say the Lucent of today may lack the full range of products needed to fill the void left by Tyco. Underwater fiber-optic gear is a rather specialized field requiring super-reliable pump lasers and repeaters to boost signal strength along vast stretches of the ocean floor. Analysts say that if Lucent needs to move quickly into this market, it may have to acquire gearmakers such as Pirelli's undersea cable unit, or pump-laser dynamo SDL (SDLI:Nasdaq). Lucent declined to comment.
And the ocean isn't the final bandwidth frontier. Satellite firms Hughes Electronics (GMH:NYSE), Gilat Satellite Networks (GILTF:Nasdaq), Teledesic and Tachyon are launching ambitious Internet-in-the-sky-type networks to span the globe.
Such concerns could put off investors who are leery of buying Lucent. "Right now, it's an incredible buy," says Bernstein's Sagawa. "But no one wants to jump into the pool until someone says, 'It's 72 degrees, come on in.'"
Still, with the competition coming in waves, investors can hardly blame Lucent for dipping a toe in. |
