Lucent on the Loose: Come October, It Can Swallow Bigger Fish
By SETH SCHIESEL and LAURA M. HOLSON
Bill Viqueira is about to have one of the most interesting jobs in the telecommunications industry. Not that he has been snoozing lately. As vice president for corporate development at Lucent Technologies Inc., Viqueira been in charge of evaluating acquisitions and partnerships for one of the world's largest makers of communications gear. Over the last two years he has directed about a dozen acquisitions worth some $3.5 billion.
But on Oct. 1 his professional life will change in a big way. That is when Lucent, two years after formally splitting from the AT&T Corp., will be able to use a form of merger accounting that could allow the company to add the prefix "mega" to its merger plans.
A spokeswoman for Lucent would not comment substantively on what the change would mean to the company and to the overall communications industry, which is simultaneously growing and consolidating. Viqueira would not comment at all. But Oct. 1 is a date circled in red in the minds of communications executives, analysts, bankers and investors across the nation.
"Some people have even been obsessed with it," said Steven D. Levy, a communications equipment analyst for Lehman Brothers. "One camp is, 'I'm staying away from Lucent because if they're going to do something big on Oct. 1 it's probably not good.' And then I hear people saying, 'I'm going to buy a certain stock because Lucent is going to buy them on Oct. 1.' "
Lucent will be able to pursue a much larger class of acquisition come October because the company will be able to use a form of accounting called pooling of interests, which is much more advantageous than the purchase accounting with which it is now stuck.
A company must be independent for two years before it can pool; Lucent spun off from AT&T on Oct. 1, 1996. Under purchase accounting, an acquiring company must take charges against its future earnings to cover the difference between what it paid and the target's assessed book value.
In the technology sector the amount of that difference, known as goodwill, can be a major part of the purchase price, because technology companies are often valued largely for intangibles like the quality of their research efforts and personnel.
For example, Microsoft and General Electric have comparable market values of about $250 billion, but very different book values: $304 billion versus only $14 billion, respectively. So buying GE would not entail writing off any goodwill, but buying Microsoft would mean writing off nearly the whole purchase price.
Purchase accounting can make big deals hard to pull off, especially for companies like Lucent with relatively conservative shareholders who resist dilutions of earnings.
Pooling solves that problem by allowing a company to pay for acquisitions with stock and to avoid having to write off any goodwill.
So while Lucent has been doing deals, they have so far been relatively small. The largest was its $1.8 billion acquisition of Octel Communications, a leader in the voice-mail market, last year.
But now, many on Wall Street are expecting Lucent to mount much larger takeovers as it tries to expand overseas and into the market for digital data communications.
"Lucent's three areas of interest are, one, data networking, two, strong market share position and three, global presence," said Alkesh Shah, who follows Lucent for Morgan Stanley Dean Witter.
Most of the large investment banks have been knocking on Lucent's door recently in the hope of garnering lucrative advisory business. In the past, the company has hired bankers from Deutsche Bank Securities, Goldman, Sachs and Morgan Stanley. (Viqueira used to be a takeover banker at Merrill Lynch.)
When Lucent emerged as a public company, the big data networking companies were largely beyond Lucent's reach, in part because their shares traded at much higher multiples to estimated earnings, making them potentially highly dilutive of Lucent's profits. But Lucent's earnings multiple has caught up and is now in the mid-40s.
One target that is rumored consistently is Ascend Communications Inc., which makes gear for integrated voice, video and data networks, and which has a market value of about $8.6 billion. (In NASDAQ trading, Ascend's shares closed Friday at $46.)
But whether Ascend wants to sell is a topic of debate. One technology banker, who spoke on the condition of anonymity, says the company's senior management has mixed opinions about whether they want their company to be acquired. If they do sell, the company may ask for a price in the mid-$70s, the banker added.
There might be one particular complication, though: If the deal between the Ciena Corp. and Tellabs Inc. falls apart, that may open the door for Ascend to buy Ciena instead.
Moreover, Ascend's deal last last month to acquire Stratus Computer Inc., a maker of network software, for $822 million was seen by many in the industry as a sign that Ascend intends to go it alone.
The Newbridge Networks Corp. of Canada, which has seen its shares slide badly this year, could be a way for Lucent to expand its data networking business on the cheap.
Perhaps the most intriguing possibility is that Lucent would try to acquire the Motorola Corp. Though the troubled Motorola has more revenue than Lucent -- about $30 billion in sales versus Lucent's $26 billion -- Lucent has more than four times Motorola's market value: $101 billion, compared with $25 billion.
Lucent is basically a nonfactor in the market for wireless phones, an area in which Motorola is a world leader (though Lucent does make many chips for the phones).
Motorola would also add to Lucent's microchip business, especially in the market for digital signal processors, which are used to handle large amounts of digital information for a variety of applications. Motorola's culture, however, is famously insular.
But many analysts believe that Lucent will first look overseas, where its presence is limited. Were Lucent to focus on the wireless market abroad, Nokia of Finland, with a market value of $37 billion, could become a target. Were Lucent to concentrate on traditional telephone systems, some analysts believe it could try to buy the telecommunications business of Siemens, the German industrial giant.
Siemens' telecommunications operation had about $12 billion in revenue last year and Lucent would most likely pay about twice that to acquire the business.
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