Lucent may join optical arms race
By Thom Calandra , FTMarketWatch.com
Last Update: 4:45 AM ET Jul 11, 2000
LONDON (FTMW) -- The planned merger of two large North American fiber-optic developers might force Lucent Technologies to join the optical arms race.
Such a move could require Lucent to shed related businesses and pick up the pace of its billion-dollar-plus networking purchases.
JDS Uniphase of Canada and SDL Inc. of California make components such as lasers for the industry that produces optically coated cables. These razor-thin lines transmit information across strands of glass. The two companies intend to combine in a stock-for-stock swap valued at $36 billion.
Anthony Gambacorta of Freedom Capital Management in Pennsylvania says optical networking represents the next generation of networking “to meet the data demands of the new global economy.”
Lucent Technologies (LU) , the onetime technology arm of AT&T, so far has been odd-company-out in the race to stuff glass fiber into the ground. “Companies such as Lucent, Nortel, and JDS Uniphase (JDSU) are unable to meet the new order flow they are receiving,” says Gambacorta, chief investment officer for $100 million fund manager Freedom. “This has led to an optical arms race as these companies buy up component suppliers.”
Gambacorta -- and others -- say JDS Uniphase’s purchase of SDL, the latest of several gigantic fiber-optic mergers, shows just how competitive the battle for components will be. Out with the copper wires and in with the glass.
The question for investors is how they can profit from the porking out of the pipeline, as I called it in a piece about accelerated Internet speeds. See the article. It’s a lot like watching from the sidelines as networking equipment maker Cisco Systems scoops up scores of companies for tens of billions of dollars.
Gambacorta’s job at Freedom is to identify undervalued companies in established Standard & Poor’s industry groups. Gambacorta earlier this year was ahead of the curve on undervalued financial stocks. He also correctly saw U.S. phone Bell Atlantic as a cheap stock just ahead of its $50 billion-plus merger with GTE Corp. See previous story.
Race is to the quick
Now it’s Lucent’s turn -- a company that has disappointed many of the AT&T investors who received shares in the former Bell Laboratories think-tank.
“Lucent has fallen behind its rivals, such as Nortel (NTL) , in executing its optical networking strategy,” Gambacorta says. Making up for lost ground, Lucent recently bought components maker Chromatis for $4.5 billion. In the fiber-optics race to wire the world, winners make tons of money. Losers end up with a pile of copper wires.
Another fund manager, Scottish Equitable’s Stuart O’Gorman, also sees Lucent, Corning and Nortel beating the bushes for acquisition targets.
Scottish Equitable has a U.K. fund worth about $400 million, of which 3 percent is in SDL shares. The fund manager also invests in Bookham Technology (BKHM) , a British maker of chips and other fiber-optic components. Bookham shares in London and on Nasdaq hit a new high this week. See story.
Bank in Pennsylvania, Gambacorta sees Lucent separating its microelectronics unit from the rest of the company. Such a move would create a currency -- common stock -- to buy component suppliers. “It would also be a significant positive for Lucent's stock,” he said. Lucent's microelectronics group makes integrated circuits and what it calls “optoelectronic components” for the computer and communications industries.
Scotland company looks enticing
After a sales warning earlier this year, Lucent shares sell for $56 each in New York -- for a market capitalization of $183 billion. Gambacorta sees the shares as high as $80 each. The stock traded for $84 last December.
“The JDS Uniphase deal puts significant pressure on (Lucent executives) to separate their high-growth optical networking business,” Gambacorta said. Lucent’s optical networking business will generate about $1 billion of revenue this year and is growing at 100 percent a year. Gambacorta figures the business is worth $45 billion if it traded as a stock.
Who does Lucent buy? Gambacorta doesn’t know for sure. Still, in Scotland’s Silicon Glen, privately held Kymata is developing commercial applications using technology pioneered at Glasgow University.
“The company is developing optical chips and sub-systems that will further increase the performance of optical networks,” Gambacorta says. One of Kymata’s chips is said to expand the capacity of an optical fiber up to 32 times.
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