1/23/98 Fin. Times 25
1998 WL 3527158
Financial Times
Copyright Financial Times Limited 1998
Friday, January 23, 1998
Companies and Finance: The Americas
Lucent facing testing times
By Nick Denton
Lucent Technologies does not look like a company about to face its
most daunting challenge. The US telecommunications equipment company
appears to be riding high.
It has just reported one of the largest earnings surprises of this
reporting season. What could be more risky than the transformation
already undergone?
In two years, the company has broken free of its erstwhile parent
AT&T, the US long-distance carrier, gone public, changed its culture,
confirmed its independent role as the largest supplier of equipment to
US carriers -- and made itself, over competitors such as Alcatel and
Siemens, the equipment company to watch.
But it faces a new challenge, in the revolution now under way in the
telecoms market. This raises questions over the role of equipment
suppliers whose business was traditionally based on sales to old-style
telephone operators.
For the moment, however, Lucent is basking in the glory of its recent
achievements. Only two years ago, Lucent existed as Bell Labs, the
research and development arm of AT&T, with a reputation for innovation
but not for dynamism.
Since the "trivestiture" of AT&T in 1996, when the telecoms monolith
split into a carrier, a computer-maker and a communications equipment
company, Lucent has performed exuberantly. Its share price has roughly
tripled since flotation in May 1996.
But three changes in the telecoms world herald testing times ahead.
First, the Telecommunications Act of 1996 in the US, and similar
liberalisation elsewhere, has triggered changes in Lucent's market.
There has been a wave of mergers among larger carriers, such as WorldCom
and MCI, and also the emergence of a new class of providers called
competitive local exchange carriers, or CLECs.
Second, buyers of communications equipment, be they carriers or
corporations, are cutting network costs, relying on fewer suppliers for
a wider range of products.
Third, the telecoms network is being subsumed by the data network.
This is happening most rapidly within companies, which are asking why
voice communications, which can take the form of digital bits, should
not travel along the same wires as electronic mail messages and other
data.
Lucent is in many ways a beneficiary of these changes. The company,
which is trying to reduce its reliance on its former parent as a
customer, said its sales to CLECs had doubled between the third and
fourth quarters.
Anumber of companies claimed this quarter that service providers were
buying less, but we haven't seen that," says Richard McGinn, Lucent's
recently appointed chairman. "What is happening is a move away from
buying bits and pieces from a whole range of companies around the
world."
This consolidation of purchases is similar to that experienced by the
data networking industry, in which Cisco Systems has won market share by
offering what it calls an "end-to-end" solution for corporate networks.
The question is whether carriers and enterprises will simplify their
purchases further as a universal network develops, turning to a data
networking company such as Cisco to supply equipment for both voice and
data traffic.
Lucent is responding to this threat by expanding its product range in
a burst of acquisitions, spending $1.8bn on Octel Communications in July
and $700m on Livingston Technologies in October. It is a strategy
similar to Cisco's, which bought more than 20 companies in the past
three years.
But Lucent faces handicaps Cisco did not face. It is on the East Coast
of the US, while many of its potential targets are in Cisco's Silicon
Valley home. The company cannot offer Silicon Valley employees the stock
options they expect without alienating its existing workforce. And
Lucent's staff, for all the changes of the past two years, are more
often "Bellheads", telecom engineers weaned by Ma Bell, than internet
pioneers.
All of Cisco's main competitors -- 3Com, Bay Networks and Ascend --
have come unstuck at one time or another as they have sought to match
its deals.
The risks in Lucent's strategy are equally great, its competitors
claim. "If they could pull off a big acquisition, that would be kind of
exciting," says John Chambers, Cisco chief executive. "But the chances
are about one in four. Almost all acquisitions fail. There are very few
Silicon Valley entrepreneurs that want to work for an IBM, or a Lucent."
Nicholas Denton
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