"Oh, No! Not Lucent! Spinning Off Agere, It Exposes Itself
by Christopher Byron
Pardon me, but do I detect the faintest whiff of panic in the
air? No, we’re not talking about the stock market. We’re
talking about the antics across the river at Lucent
Technologies Inc. of Murray Hill, N.J.
As far as the stock market goes, well, frankly it’s good news
in all directions. Not only are prices returning to more
justifiable valuations, but I can assure you—based on our
infallible honker for fashion trends—that from here on out, no
one sporting blue hair and a ring through his tongue will be
invited to make a deal-pitch on Wall Street ever again.
Take it from me: The dot-com dress code is dead, and if stock
prices will only sink a wee bit more, I think we’ll be able to
kiss goodbye to casual Fridays as well. This could be the most
salutary development in the entire market downturn: It was
hell while it lasted, but it’s finally getting good to be a
grown-up again. So, break out the Brionis, boys. In the
endless hunt for money on Wall Street, it’s once again O.K. to
dress for success.
As for what’s been going on across the Hudson, that’s another
story. In case you missed it, we’ve lately been witness to the
curious spectacle of Lucent’s vice chairman and one of his own corporate
spokeswomen issuing dueling—and seemingly contradictory—statements to the
press concerning the fate of an initial public offering of Lucent’s prized business
asset, a chip-maker bearing the pointless and white-bread name of Agere Systems
Inc.
Meanwhile, the offering itself continues to undergo so many mark-down repricings
and redraftings that it is beginning to look like a discount schmatte from the
irregulars rack at T.J. Maxx—the predictable result of an effort by Lucent and its
investment bankers, Morgan Stanley Dean Witter & Company, to stick a false
nose and mustache on $2.6 billion of Lucent debt and sneak it into the Agere
I.P.O. disguised as equity.
Room-Emptying Dud
When the ill-tempered cranks here at Curmudgeonly Arms first called attention to
the hustle six weeks ago, the fancy-pants crew at Morgan Stanley got so bent out
of shape you’d have thought we’d suggested that they were no better than the
bunch at Whale Securities—especially when we labeled the overpriced offering a
“fiasco in the making” and declared that if we turned out to be wrong, we would
kiss Phil Purcell’s fanny in a Macy’s window.
Six weeks later, the offering has proved to be such a room-emptying dud with
road-show investors that the price, as measured by the market value, has been cut
by 40 percent, and the attempted bamboozle by which Lucent’s debt was to be
converted into Agere equity has been removed from the deal (replaced by a much
smaller swap that would take place only if, by some miracle, the offering is
oversubscribed).
And in spite of all that, the fate of the deal still seems in doubt. This is terrible
news for Lucent, which desperately needs to extract some ready money from
somewhere. The company’s revenue is slumping, its expenses are rising, and it has
slipped into the red on both an operating and net-income basis.
What’s worse, Lucent’s tangible net worth has slipped to less than $5 a share, and
the company has lately been burning through its remaining $3.8 billion of cash and
equivalents at a rate of close to $5 billion a year.
During the three months ended Dec. 31, revenue dropped by 28 percent, to $5.8
billion, and net income from continuing operations plunged almost $1.6 billion into
the red, even as $1.1 billion of cash from operations flew out the window.
The company recently announced a seven-point restructuring plan that will
supposedly fix all that—and they’d better hope it succeeds, because if the situation
doesn’t turn around fast, the cash drawer will be nearly empty by Labor Day.
This is all certainly distressing for a company with Lucent’s resources, expertise
and market clout, and it goes to show the damage that can be done when you miss
even a single product cycle on the Mach-10 track of high technology. Before you
know it, the entire company is crashing into the guard rails.
As you’ll doubtless recall, Lucent began life as a hodgepodge of assets spun off
from AT&T Corporation back in April of 1996. There was a manufacturing
operation (Western Electric), a research arm (Bell Labs), a chip-making business
(the Agere bunch), a networking business and other stuff besides. Since then, the
company has shed one operation after the next in an effort to pare down the
business to its core activity of designing and hooking up network systems for
telephone companies.
This made Lucent increasingly—and by now, almost totally—dependent on a
business that was viewed two years ago as being at the cutting edge of the
information revolution: networking the world for the presumed explosive growth of
the Internet.
Unfortunately, it is that very business that has collapsed, dragging down such
companies as Cisco Systems Inc., JDS Uniphase Corporation, Nortel Networks
Corporation and many others.
Lucent has been beaten up the most, with its stock price falling from a
split-adjusted high of close to $80 a share in December 1999 to its current price of
about $11, cutting the company’s market value from $255 billion to $37 billion.
Meanwhile, Lucent’s problems have been worsened by misreading demand for its
own networking products, with the result that the company was more than a year
late in developing a kind of super-fast optical-networking product known as an
OC-192—which gadget, I am told, was the must-have thingamajig for Lucent’s
customers looking to build out their networks.
Through it all, Wall Street kept raising the performance bar for all networking
companies, with the result that Lucent, like many others, was soon ginning up new
business by financing the sale of its products to upstart companies with doubtful
business prospects.
This ill-advised tactic—which amounted to little more than conjuring up the
appearance of growth by taking money out of one pocket and putting it in the
other—has now placed Lucent on the hook, as of Dec. 31, for $740 million worth
of “guarantees” on customer borrowings, with potential exposure of $1.8 billion.
On top of those guarantees came another $1.8 billion of actual, out-and-out loans
by Lucent to the customers themselves—with potential exposure in the latter
category running to a startling $7.3 billion.
All in all, you’re talking about more than $2.5 billion of revenue that was
concocted out of loans and loan guarantees alone, with the potential total running
to more than $9 billion.
A lot of these loans and guarantees have been to outfits like Winstar
Communications Inc. of New York, which still has $300 million to $350 million of
credit available to it on a $1 billion–plus credit-line facility from Lucent.
Winstar operates a wireless network based on line-of-sight rooftop antennas on
office and apartment buildings in cities all over the country. Financially speaking,
Winstar looks like the networking world’s answer to Amazon.com, with rising
revenue, accompanied by deepening losses, being posted in almost every quarter
without let-up for years now.
Winstar’s debt has lately been downgraded to junk-bond status, and its stock has
plunged 75 percent in just March alone. The shares now sell for less than $3,
whereas a year ago they were changing hands at $66. Lucent won’t comment on
the matter, but at least one Wall Street investment firm recently published a report
to clients indicating that perhaps as much as $700 million of this junk debt now sits
on Lucent’s balance sheet as a result of the credit deal with Winstar.
How much doubtful debt there is altogether, from all such deals, is hard to say. But
if you wipe out the $2.5 billion of exposure the company already has as a result of
its loans and loan guarantees, tangible net worth on the balance sheet would drop
to no more than $4 a share as of Dec. 31.
Burning the Furniture
And if you assume that another $1 billion of cash was burned up in the
January-March quarter, tangible book value might by now be approaching $3.75 a
share. These numbers explain why Lucent has been so frantic to fob off its
chip-making operation, Agere Systems.
Agere is a money-maker, to be sure. In fact, it’s the biggest single money-maker
Lucent’s got, providing 11 percent of Lucent’s year 2000 revenue and literally all
its operating-cash flow. But it’s cold outside in Murray Hill these days, and Lucent
needs to keep warm through the winter. So, having already thrown the living-room
sofa—i.e., the company’s power-systems business—into the fireplace in a $2.5
billion cash sale to Tyco International Ltd., Lucent is now throwing the family’s
prized Hepplewhite dining-room table—Agere—into the blaze as well.
The original idea behind the Agere I.P.O., as spelled out in this space several
weeks ago, was to shed $2.5 billion of debt from Lucent onto Agere’s balance
sheet directly, while moving another $2.6 billion off Lucent’s books via a
super-confusing “exchange offer.” Under its terms, the Lucent debt would be
converted into Agere equity in such a way that all of the benefit would flow to
Lucent and none would go to Agere.
In preparation for this finagle, Morgan Stanley—the underwriters in the
deal—began loading up on Lucent commercial paper, until a total of more than
$1.6 billion of it was sitting on Morgan’s balance sheet. As part of the I.P.O.,
Morgan was supposed to exchange this debt for an equivalent amount of Agere
stock from Lucent, then sell the shares in the I.P.O., thereby making itself whole
(plus fees, natch!) while the debt itself simply disappeared.
But so many investors apparently balked at the ploy that the exchange transaction
has been axed from the deal. This now leaves Morgan sitting with some $1.6
billion of Lucent commercial paper. Since commercial paper is, by definition, very
short-term debt, it will be no time at all before the whole $1.6 billion of it will wind
up back in Lucent’s lap when the company has to pay it off. And you can be sure
Morgan won’t be in the market to buy any roll-over paper to replace it. After all,
Morgan never wanted the stuff in the first place, and only acquired it as part of the
exchange offer that has now collapsed.
Since Lucent won’t be able to shed the debt by converting it into Agere equity, it
may have to pay off the paper by drawing down at least $1.6 billion of a $4 billion
credit line that it badgered out of some clearly reluctant banks just last month. This
means that if the I.P.O. actually takes place, only $2.5 billion of Lucent debt will
be moved off its balance sheet, instead of the more than $5 billion that it had
originally anticipated.
But $7.1 billion of assets will also be moved from Lucent to Agere, and will thus
disappear from Lucent’s balance sheet as well—meaning, by my calculations, that
Lucent’s tangible net worth will drop to a mere $2.35 or so a share. Is it any
wonder that the Standard & Poor’s credit-rating company now says Lucent runs
the risk of seeing its more than $8 billion of debt, both long- and short-term, be
downgraded to junk status if the company monkeys around with the I.P.O. any
more or delays it any further than the end of the month?
Even so, it would seem that among those who didn’t get the word was Lucent’s
own vice chairman, Bernardus (“Ben,” they call him at Lucent) Verwaayen, who
told reporters in Europe on March 21 that the company might actually scrap the
whole idea of the I.P.O., and that no decision would be made one way or another
until the coming week.
The next day, a Lucent spokeswoman in Murray Hill popped up to declare that the
company in fact plans to go ahead with the offering “irrespective of market
conditions,” on the assertion that Agere’s “business potential” will be “best served”
as a separate company. Maybe you can figure out how those positions can be
synthesized, because I can’t, and I’ve listened to Lucent brass on the matter plenty
already.
The oddest explanation of all: that because he was in Europe, the vice chairman
was somehow out of the loop and not privy to the fast-changing situation—to
which I say, if things are changing so fast that the No. 2 guy at the company
doesn’t know what’s going on, maybe the situation is a little too unsettled.
Be that as it may, we can certainly say that not a lot is going on over in Murray
Hill, N.J., at the moment to inspire confidence among investors that either Lucent
Technologies or its Agere Systems I.P.O. is a good place to park one’s money.
Over the long term, both could turn out to be great investments. It’s just that,
short-term … well, let’s simply end it by saying that our offer regarding Macy’s
window remains on the table.
observer.com |
