McGinn called a "pathological liar" by fund manager; Lucent's descent "of epic proportions."
Personal Capital: Lucent is a loser
redherring.com
By R. Scott Raynovich
Redherring.com, October 12, 2000
Last time Personal Capital visited Lucent Technologies
(NYSE: LU), in June, I called it one of the "unloved." Now
it's downright hated.
The past few months for Lucent should go down in history
as one of the most cataclysmic breakdowns in global
business management. The company reported its third
earnings warning of the year on Tuesday night, and the
stock fell more than 30 percent on Wednesday as a result.
Lucent, once considered a bellwether technology growth
stock, is off its rocker, and management's ridiculous
assessment of the situation leads you to wonder what
they've been doing for the past year. It's hard to see
chairman and CEO Rich McGinn finishing the year in his
current post.
Deborah Hopkins, Lucent's new chief financial officer,
actually told the audience during the company's Tuesday
night conference call that she thought Lucent was "sitting
on a pile of gold."
Lucent investors must be wondering where she's stashed
the ore. They have seen their pile of gold gathered up as
dust and blown into the wind. At the beginning of the year,
Lucent was trading at $72, and now it's flirting with the
teens. Investors holding the stock at the beginning of the
year have lost more than 70 percent of their money.
WHAT WENT WRONG?
What happened? First of all, Lucent missed the grandest
opportunity in a business in which it was supposed to be a
leader: optical networking. Whereas companies such as
Cisco Systems (Nasdaq: CSCO) and Nortel Networks (NYSE:
NT) have fueled their corporate growth by successfully
introducing new optical product lines and making strategic
acquisitions, Lucent simply missed the boat. In its latest
earnings warning (Lucent might as well start scheduling
conference calls for its warnings, as well as earnings
announcements, because they appear with such regularity),
the company said its optical systems revenue would be
down 5 percent in the quarter from the year-ago period.
Yes, that's right -- the company announced negative
growth in one of the fastest growing segments of the
technology market.
The good news: the sympathy hit in related networking
stocks was unwarranted, since this grim situation couldn't
be more company-specific. Lucent is losing, and others are
winning. Hence, optical networking's importance as a cog of
growth in the networking sector has swelled, rather than
abated.
The second part of the good news: the Lucent debacle
reaffirms startup culture and underscores the importance of
moving quickly and decisively in emerging technology
markets. If you're not a startup, you must find ways to
integrate them. Innovate or die.
The bad news, for Lucent shareholders: it's become evident
from the deterioration of the financial situation that the
current management team lacks the skills to turn this
company around -- and Wall Street has certainly voted on
the matter. Mr. McGinn stated earlier in the year that he
was spinning off Avaya Communication (NYSE: AV) (and
now the components business as well) to leave Lucent with
the highest-growth business. Well, now that he's whittled
the company down, his share of the highest-growth
business, optical networking, is actually declining. Call it the
spin-down strategy, rather than a spin-off strategy.
OFF WITH MCGINN'S HEAD
On top of these strategic disasters, the current
management team has done a miserable job of accurately
assessing and informing the public of its problems and
managing its relationship with Wall Street investors. The
scorn for Mr. McGinn has reached epic proportions on Wall
Street. One fund manager, asking not to be named, calls
him a "pathological liar."
Even Wall Street analysts, traditionally polite in their
research reports, are starting to question the explanations
given by Lucent's management team.
"Over the last few quarters, Lucent management has
suggested that many factors such as production
constraints, lack of qualified installation employees, and
aggressive pricing by competitors limited optical system
sales and profitability," wrote Steven Levy, an analyst with
Lehman Brothers, in a research report on Wednesday. "The
company's management is now saying that the gating
factor is customer acceptance."
At this point, Lucent investors still holding the stock might
be so far down on their luck that they might consider
holding onto their shares hoping for the best in the long
term. The company is obviously heading for a major
restructuring, and possibly a revamped management team.
But can it get any worse? Based on management's recent
track record, you have to assume yes -- it will get worse
before it gets better. |
