Lucent Builds Through Buying. [ASND references]
(05/01/98; 8:05 p.m. ET)
By John T. Mulqueen, TechWeb
techweb.com
Think of Lucent Technologies as a stodgy
125-year-old telephone equipment manufacturer?
Think again. The vendor is acting like a Silicon Valley
start-up -- albeit a very big, wealthy one.
That role reversal rang true more than ever this week,
when Lucent (company profile) disclosed its planned
$1 billion cash acquisition of Yurie Systems for its
Asynchronous Transfer Mode (ATM) and voice/data
technology.
Since its $3 billion initial stock offering in April 1996
-- the largest in U.S. history -- Lucent's shares have
shot up to more than $75 from $13.50, adjusted for a
two-for-one split. In the 15 months prior to the Yurie
deal, the company spent $2.9 billion to acquire Agile
Networks, Livingston Enterprises, Octel
Communications, and Prominet Technologies.
In October, on the two-year anniversary of having
been spun off from AT&T, Lucent will be able to use
pooling instead of purchase accounting -- and thereby
avoid a major earnings hit -- to make acquisitions.
Once that limitation is lifted, the company is widely expected to spend as much as $30 billion, on one or
more acquisitions.
The key questions are: Will IT managers buy into
Lucent's vision, and who will Lucent target for
acquisition?
For all its prowess in the carrier equipment and PBX
markets, Lucent still has a recognition problem in the
data networking world.
Andrew Thompson, director of telecommunications at
a $13 billion electrical equipment manufacturer, said "I don't know anything about Lucent's data networking
products." Thompson's employer does use Lucent
private branch exchanges. His company uses Cisco
switches and routers, and Bay Networks hubs. "I
don't see any reason to take out what works," said
Thompson, who did not want his company's name
used.
Regardless of perception or recognition, Lucent's
William O'Shea said the data networking market is too
hot for the vendor to ignore. That market is growing as
much as 25 percent annually, according to figures
cited by the Lucent group president of data
networking and business communications.
Some parts of the market are more attractive than
others. Lucent is emphasizing intelligent switching,
remote access products, and optical networking gear
-- not routers, hubs, or adapter cards, where growth
is slowing as those products edge toward
commoditization.
Incumbent Networking Vendors Pose Challenge
Lucent faces formidable challenges from incumbent
networking vendors, primarily Cisco, with its long
track record of developing products faster than Lucent
and pricing them lower. Northern Telecom also has a growing enterprise data networking business, and is on the acquisition hunt.
In addition to reselling other vendors' switches, Lucent
is developing its own ATM products and expects to
release a router sometime this year.
Most vendors realize acquisition is often the fastest
and cheapest way to get products to market, and
Lucent reportedly has been looking at Bay and
Ascend Communications for more than a year. Either
could give Lucent a major presence in desired data
networking niches, but there are skeptics.
Todd Dagres, a partner at Battery Ventures, said
Lucent wants to own the user connection from end to
end, as Western Electric once did with the telephone
network. To carry out that strategy, Dagres said
3Com would be a better fit.
Steve Levy, a former AT&T manager and now an
analyst at Solomon Bros., thinks Lucent is primarily
interested in WAN switches, not the desktop or LAN
products that a company like 3Com would bring to
the table.
Bay is too heavily involved in hubs and routers to
interest Lucent, and it does not need Ascend's data
termination gear now that it owns Livingston,
according to Levy.
Even with the acquisitions, data networking so far
accounts for only about $500 million of Lucent's
$26.4 billion annual revenue, and some analysts think
the company should stick to the carrier market.
Whichever way Lucent moves, its stock provides the
currency for a big purchase. The company has a
market value of more than $70 billion.
Not surprisingly, Richard McGinn, Lucent's
63-year-old chairman, is not letting on how he will
spend that wealth. He will not make an acquisition that
will seriously dilute Lucent's earnings.
Focus On High-Growth Segments
McGinn makes no bones that he will both buy
companies and pour money into research to feed his
hungry giant. In addition to the Yurie deal, Lucent
recently spent $60 million to buy a German wireless
software supplier.
"Right now, Lucent is investing over $3 billion in R&D, and the vast majority of that is focused on the
highest-growth segments -- wireless, communications,
semiconductors, data networking, hybrid networks,
and access products associated with that," McGinn
said in an interview.
Although McGinn has reorganized the company into
11 business units to focus on fast growth
opportunities, he also has used Lucent's strong
balance sheet to supply Sprint PCS with $1.8 billion in
financing for the construction of its wireless network,
which uses Lucent and Nortel equipment.
The strategy driving the company emerged after
AT&T announced the spin-off of the former Bell Labs
in September 1995.
Bart Stuck, a former Bell Labs engineer and now head
of consultancy Business Strategies, credits McGinn for
dividing Lucent into the new business units. Lucent has
always been strong in technology, but the company
was "relatively slow in getting product out to the
market," Stuck said.
Bell Labs invented WDM for optical networks, only
to let 3-year-old Ciena seize the lead in that area, he
said.
Harry Boscoe, chief operating officer of the optical
networking group at Lucent, admits the company
missed the early market on the 16-channel DWDM
equipment. But he said it is learning from the misstep.
Lucent has announced a new system that will support
as many as 80 channels that can carry a total of 3.2
terabits of traffic. Ciena has announced a product with
40 channels that can handle 96 gigabits, for delivery
later this year.
Search Archives
Related Stories:
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Yurie For $1 Billion
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For Second Quarter
Lucent Acquires
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