Lucent is ready to make acquisitions
I n the past two years, Lucent Technologies has acquired
more than one dozen companies. In all these
acquisitions, Lucent paid cash through the issue of
shares and must subtract from its future earnings the premium of the
purchase price over the book value of the acquired companies, with
amortization over a 20-year period. This earnings penalty will be lifted on
October 1 this year and Lucent is then free to use the 'pooling of interests'
method to buy more companies.
Let's take a brief look at what Lucent can do that they couldn't do before October
1, and what impact this change may have. Essentially, the pooling of interests
assumes that all of the acquired company's shares are acquired in exchange for the
parent company's common shares. Now the acquired company's shareholders are
shareholders of the parent company and a mutual pooling of interests has taken
place.
Why can't Lucent take advantage of this low-tax acquisition method before
October 1? When Lucent was spun off from AT&T in September 1996, the deal
was tax-free for its shareholders in order to gain approval for the spin-off. Under
U.S. accounting laws, this prevented Lucent from using pooling of interests to make
deals for two years. If Lucent had pooled before October 1, 1998, it would have
risked losing its tax-free status.
This crippling situation no longer applies after October 1. Once restrictions are
lifted, Lucent will be encouraged to make larger acquisitions. Its share price has
soared to about six times its initial value in 1996. With a market capitalization of
over USD 120 billion (August 1998 value), Lucent can acquire companies by
swapping shares at market price. The company plans to spend some USD 30
billion on mergers and acquisitions. Lucent's most immediate need is data
networking, with companies such as Ascend, 3Com and Newbridge as possible
targets in terms of IP routing and ATM technologies and products. The second
priority is the global marketplace. The telecom equipment business units at
Nokia,
Alcatel or Siemens would give Lucent access to markets outside North
America.
Lucent has been searching for major acquisition prospects for two years. We
expect that they will announce several mergers and acquisitions after October 1.
These will enhance the scale of and expertise behind Lucent's product portfolio in
order to compete head-to-head with Cisco, Nortel and others.
Bobby Chang works for Ericsson's Business Intelligence unit, where he keeps an
eye on developments in the North American market.
Find out more about Ericsson Business Intelligence Network, EBIN, on the BIC
(Business Information Center) web site.
bic.ericsson.se
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