Nortel Races On As Lucent Struggles To Catch Up
cnetinvestor.com.
Nortel Races On As Lucent Struggles To Catch Up
By: Steven Syre And Charles Stein
7/31/00
Source: NY Times
It turns out you can teach some old dogs new tricks. And in the new economy, the dog that learns the new tricks gets the bone;
the one that doesn't gets treated like a dog on Wall Street.
Two old dogs - Nortel Networks and Lucent Technologies - reported their earnings last week. Both companies have been
around for a while, albeit under different names, and both have become behemoths selling equipment to the world's big
telephone carriers.
But that is where the similarities end. Lucent reported disappointing earnings and warned that it would struggle for the next
two quarters at least. Nortel had terrific earnings and promised more of the same for the rest of the year.
Nortel stock is up almost fivefold since the beginning of 1999 and now commands a market value of $235 billion. Lucent's
stock is down 40 percent from its 1999 high; its market value is $156 billion, even though its sales are greater.
Why the divergence? The simple answer is that Nortel figured out which way the world was heading and got their first. Lucent
started late and hasn't yet found a way to catch up.
The race between the two giants is of more than passing interest. Lucent has a large work force in Massachusetts and just last
week spent $1.3 billion to acquire Spring Tide Networks, a Maynard, Mass. start-up. Nortel said last week it wanted to hire
1,800 people to work at its Massachusetts facilities.
The telecom business is facing what Harvard Business School professor Clayton Christensen calls ``disruptive change.'' The
rise of the Internet and the demand for systems that can carry data as well as voice has created a need for a whole new
generation of telecommunications gear.
The traditional voice equipment that Lucent and Nortel make has become a mature market. The action has shifted to the new
stuff - fiber-optic products.
Nortel recognized that tilt in late 1997.
``It became really clear that we needed to make a big shift and I mean big shift,'' chief executive John Roth explained in an
interview with the Wall Street Journal.
Nortel's radar may have been keener because some of its customers were the newer, more forward-thinking carriers.
``These guys were building networks from the ground up and they wanted the latest and greatest stuff,'' said Richard Crable, an
analyst with Loomis Sayles.
Lucent, by contrast, sold mainly to the established carriers, AT&T and the Baby Bells, and that group anticipated a much
slower transition to the new world.
In this case the future came sooner rather than later and Nortel was ready for it. In the most recent quarter Nortel sold an
estimated $1.5 billion to $2 billion worth of new-generation gear, according to Crable. Lucent sales of comparable products
was only $192 million.
But anticipation is only half the battle. The other half is execution. Here, too, differences have emerged between the two rivals.
Both companies have relied on acquisitions to speed their entrance into new markets.
(On Friday, Nortel agreed to buy San Jose's Alteon WebSystems, a maker of Web switches, for $7.8 billion in stock.)
Nortel spent $7 billion to buy Bay Networks of California two years ago. Soon after Lucent spent $20 billion to buy Ascend
Communications, a California company that previously had acquired Cascade Communications, a hot Massachusetts firm.
Analysts say Nortel has successfully integrated Bay. The integration of Ascend has not gone as smoothly.
``People have bailed out of Ascend like men going overboard,'' said Howard Anderson, senior managing director of YankeeTek
Ventures in Cambridge, Mass.
Many of those bailing out started their own telecom companies, becoming Lucent rivals in the process.
In 1999 Lucent paid $900 million for Nexabit Networks, a Marlborough, Mass. company that was developing a
new-generation router.
``The Nexabit router was widely perceived to be a neat product but we haven't seen any volume shipment yet,'' said Andrew
Cray, an analyst with the Aberdeen Group in Boston.
Recently Nexabit's founder left Lucent and set up a competing firm across the street.
Nortel and Lucent have plenty of company in the telecom business. A host of young pups, including Sycamore Networks in
Massachusetts and Juniper Networks in Silicon Valley, are challenging the old dogs. A group of European gear makers are
trying to sell into the same market.
For now, however, Nortel is well-positioned in the race to the future. Asked what would have happened to his company had it
not moved quickly enough, Nortel's Roth told the Journal: ``We would have looked like some our competitors . . . not as
interesting.'' |
