Pecan rolls cooling. . . wrapping and ribbons everywhere. . . fire roaring (it's cold here in SoCal). . . carols on the stereo. . .
and still time for an article from today's IBD. Reinhardt Krause is one of the best networking/ telecommunications journalists I know, apart from those like Loring Wirbel who write for the industry.
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Lucent Waits By Phone For Blockbuster Merger
Date: 12/23/98
Author: Reinhardt Krause
Lucent Technologies Inc. isn't ready to pull the trigger on a blockbuster deal, even though the telecommunications gear maker now has more freedom to do so.
Industry speculation has been rife over Lucent's strategy since Oct. 1. That's when the Murray Hill, N.J.-based company, spun off by AT&T Corp. two years ago, was first able to make big mergers under more favorable accounting rules.
Lucent appears in no rush, though, to snap up a large partner, analysts say. The company's biggest acquisition to date has been Octel Communications Inc., which was purchased in '97 for $1.8 billion. But analysts feel Lucent could absorb a company worth several times that amount - if the deal is right.
''Just because they're allowed to do pooling doesn't mean they will,'' said Steven Levy, analyst at Lehman Bros. in New York. ''There's no sense of urgency for them to do something. It's more of a market perception.''
As of Oct. 1, Lucent was free to use accounting rules known as ''pooling of interests.'' Lucent had been restricted until then because a company must be independent for two years before it can pool.
Pooling enables stock-swap takeovers, which lower the cost of making acquisitions. Companies combine assets, hence the name. Pooling also gives Lucent more options, analysts say.
Other merger methods include taking charges against future earnings. The amount depends on the purchase price. Companies write off any amount paid above the fair market value of the acquired company's assets.
Lucent may be better off making further small acquisitions to stockpile key technologies, analysts say. Lucent could take aim at hot start-ups instead of buying costly public companies.
''I would prefer they do a niche acquisition strategy rather than a mega-deal,'' said Joseph Bellace, analyst at Merrill Lynch & Co. ''It's a lower-risk strategy.''
And there seems to be little reason to rock the boat. Lucent says it's taking market share from rivals Alcatel S.A., Motorola Inc. and Nortel Networks Ltd.
In the fourth quarter ended Sept. 30, Lucent's net income before charges rose to $548 million, up 48% from $369 million a year earlier. Sales climbed to $8 billion, up 16% from $6.9 billion.
But there's a catch to Lucent's rosy outlook, analysts say. Phone companies are upgrading networks to handle more data traffic, including voice calls converted into digital bits. That means phone carriers are not opting for the traditional telecom gear Lucent makes.
So Lucent must battle new rivals such as Cisco Systems Inc. San Jose, Calif.-based Cisco makes data networking gear. And Cisco's been on a buying spree to gain voice expertise.
Then there's Nortel for Lucent to worry about. Nortel acquired data gear vendor Bay Networks Inc. for $6.9 billion earlier this year.
So Lucent may be pressured to make a big move, analysts say. An oft-rumored target is Ascend Communications Inc.
Share prices may affect Lucent's strategy. Lucent's shares soared in the year to date through July, hitting 108 1/2, giving the company more buying power. Amid global market turmoil, though, shares fell from midsummer through October to a low of 53 7/16. They've rebounded since, closing Tuesday down 1 3/4 to 102 1/8.
Ascend's shares, meanwhile, closed Tuesday up 1 to 65 7/8. They were at 38 in early October. Ascend makes high-speed networking gear for mixing voice, video and data traffic.
''The likelihood of Ascend happening is declining,'' said Alex Cena, analyst at Salomon Smith Barney Inc. ''They (Lucent and Ascend) have more of a product overlap now than in the past.''
Alameda, Calif.- based Ascend also has formed marketing ties to French gear maker Alcatel SA. And Ascend's market cap stands at a hefty $12.3 billion. Lucent may not want to fork up a premium to buy it, analysts say.
''Business is good at Ascend, and (Chief Executive Mory) Ejabat may want a price Lucent isn't willing to pay. It keeps going up,'' Bellace said.
If Lucent goes shopping again, it might target start-ups making more-advanced data routers.
These network devices are simply called ''big fast routers'' in the telecom industry. Like large phone switches, these routers control the flow of voice and data traffic along networks.
The business has spawned a wave of upstarts, including Avici Systems Inc. of Billerica, Mass.; Juniper Networks Inc. of Mountain View, Calif.; Nexabit Networks Inc. of Marlboro, Mass.; and Torrent Networking Corp. of Silver Spring, Md.
On the other hand, Lucent may have plenty of competition for buying up-and-coming data networking firms. European equipment makers are forking over big bucks in the U.S. for acquisitions.
Alcatel plans to spend $4.4 billion in stock to buy DSC Communications Corp. of Plano, Texas. That deal, announced in June, is pending.
Sweden's L.M. Ericsson AB in September agreed to buy a subsidiary of Canada's Newbridge Networks Corp., Advanced Computer Communication, for $285 million in cash. Finland's Nokia Corp. last week acquired Canada's Vienna Systems Inc. for $90 million. Newbridge had owned 30% of Vienna.
''The real pressure is on some European telecom vendors to make data acquisitions,'' Bellace said. ''The ones hurting the most are Alcatel and Siemens (AG).''
Germany's Siemens has marketing ties to both Newbridge and Santa Clara, Calif.-based 3Com Corp.
Not all mergers among communications gear makers in '99 will involve data companies, analysts say.
''The (equipment) industry is in the early stages of consolidation,'' said James Parmelee, analyst at Credit Suisse First Boston in New York. ''All the vendors are trying to fill in product gaps and improve their geographic coverage.''
If Lucent opts to expand globally and boost its wireless business, the company might make an offer for Nokia, Cena says.
Lehman's Levy says the desire to get products to market more quickly is driving deals.
''Product cycles are getting shorter, and companies (like Lucent or Cisco) can't develop everything in-house,'' Levy said.
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