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July 1, 1999
Lucent: Still Hungry After All These Deals
By Alec Appelbaum
SOMETIMES a stock becomes proxy for an entire industry.
The old AT&T (T) did this for phones, while Microsoft
(MSFT) represented software for a while. On Monday,
Lucent Technologies (LU) completed its purchase of
Ascend Communications, a leading vendor of switching
equipment for high-speed Internet data. At a shindig in
California, 2930 miles from Lucent's New Jersey
headquarters, Lucent audaciously declared itself the world
leader in communications networking. But CEO Rich
McGinn has some more shopping to do before Lucent
becomes the essential networking stock.
Lucent dominated phone equipment sales, both as part of
AT&T and in the three years since its independence, by
selling nuts and bolts to big carriers. Those carriers, from
AT&T down to scrappy competitors, still represent huge
orders. But since the Internet has made high-speed data
transmission so important to all kinds of industries, carriers
are diving into the realm of "managed services," customizing
networks to suit business customers' individual needs. So
an equipment supplier must have a full arsenal of goods in
its warehouse for anything these customers might decide they need.
"Lucent wants to be a full-service provider for both" carriers and the businesses they serve, says Lee
Doyle, an analyst with International Data Corporation (IDC). In the past, Lucent would have just built
any specialty its customers demanded at its legendary Bell Labs division, which invented everything
from the touch tone to call waiting. But the competitive clock runs too fast for that now.
"They have to be on their toes and come to market very quickly," says Christin Flynn, a hardware
analyst with market research firm The Yankee Group. "There are a lot of startups developing these
products, and in some sense it's less expensive for Lucent to just go out and buy them."
True enough. With a market capitalization of $180 billion, Lucent has plenty of currency for acquisitions
to expand its self-computed 7% share of the worldwide communications business. But who could it
buy? We went snooping and came up with three product areas the company might want to fill out as it
seeks to knock rivals like Cisco Systems (CSCO) and Nortel Networks (NT) off their perches.
One important piece it doesn't own is integrated access devices, which
take any form of communication and translate it into digital bits that can
travel over a high-speed network. The Yankee Group's Flynn notes that
Lucent's traditional phone company customers and Ascend's
customers are trying to help businesses replace old-fashioned networks
with digital ones. They might reward Lucent for owning the hottest
technology.
On Monday, Lucent expanded its reseller agreement with Vina, a private
venture-funded operation that makes especially fast integrated access
models. Who else is out there? Flynn cites profitable Adtran (ADTN),
penny-stock Verilink (VRLK) and large, beleaguered Newbridge
Networks (NN). Lucent would control its costs and pricing more surely
if it bought one of them for the right price.
The same goes for a piece of equipment known as access routers. "None of Ascend's equipment would
help routing needs," says Flynn. Many of Lucent's smaller buys over the past year have given it
equipment that connects to the router in a business network.
IDC's Doyle says Lucent's recent purchase of Nexabit Networks addresses "high-end" customers in
this area, while an internally developed product called PacketStar aims for a broader audience. Doug
Ruby, chief technology officer of Lucent's InterNetworking division, says this product is Lucent's
second-biggest seller to businesses. But it's probably a distant second. And if big orders don't speed
up for the PacketStar in the next year, Ruby's boss might break out his checkbook.
The market is thin. Giga Information Group analyst Jim Slaby says Cisco has 70% of the
Internet-enabled router market; Nortel and Siemens bought access-router specialists earlier this year.
Redback Networks (RBAK) remains independent, but its shares, trading 421% above their May 18
offering price, might not be easy for McGinn to swallow. Smaller players include Brooktrout
Technologies (BRKT) and private firms like Xedia.
Lucent is also fiercely proud of its technical innovations in voice-over-Internet systems, and it's spent
billions on software to help customers manage the change from one kind of network to another. For that
reason, Lucent seems disinclined to make a play for 3Com (COMS) or Cabletron Systems (CS), two
large firms that have lots of customers but lots of what one industry analyst calls "garbage."
Lucent's appetite for garbage is probably nil, but its appetite for new customers is growing. As Doyle
points out, its "old buddies" at AT&T will spend heavily on upgrading cable systems for voice and
Internet service in the next couple of years. With a relatively "weak" cable product line, Doyle says, the
company might snatch promising cable-equipment specialists such as Com21 (CMTO) or Terayon
(TERN), which are cheaper and simpler than 3Com. Credit Suisse First Boston analyst Jim Parmelee,
who reinstated coverage on Lucent Wednesday, says the firm's marketing alliance with Motorola
(MOT), announced two weeks ago, is the first salvo in a longer cable campaign.
Ruby, himself a prize from an early Lucent acquisition, mostly wants to talk about beating Cisco. "If a
customer is really open to making a purchase decision, we have a very good product" for networking
voice and data, he insists. And with customers' appetite for new gear growing, a few more very good
products could make Lucent the king of the networking hill.
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