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Technology Stocks : LU - Lucent Technologies NEWS ONLY! -- Ignore unavailable to you. Want to Upgrade?

To: Walter Morton who wrote (6)	9/14/2000 10:19:25 PM
From: Maverick	Respond to of 62

MSDW: rated LU ST BUY, $85 tgt MORGAN STANLEY DEAN WITTER's 8/11/00 Excerpts follow: Company Description Lucent Technologies, spun off from AT&T in 1996, combines AT&T’s former systems and technology units with Bell Labs’ research and development capabilities. Lucent is a global market leader in the sale of public telecommunications systems and software, and supplies most of the world’s largest network operators. Lucent also is a global market leader in the sale of business communications systems, and provides microelectronic components to manufacturers of communications systems and computers. In March, Lucent announced a spin-off of its Enterprise business. The new company, Avaya, will contain the company’s PBX, Systemax business cabling, and LAN-based data businesses. The spin-off should be completed by the end of September. Also, Lucent expects to spin-off the optoelectronics components and integrated circuits portions of its microelectronic business in early 2001. The remaining company (to keep the name Lucent) will focus on optical networking, Internet infrastructure, semiconductors, data, and wireless access solutions, and design and consulting services. Valuation We rate LU Strong Buy, with a target price of $85 per share. We regard Lucent as the core holding in the telecom equipment universe due to its leading position in broadband and wireless Internet infrastructure products, and its relatively low trading multiple of about 30 times our fiscal year 2001 EPS estimate. Upside to our revenue and EPS forecasts could be driven by faster a ramp-up of OC-192 optical systems sales, stronger than expected sales of data networking, wireless systems or professional services products, or operational restructuring of the optical network. In our view, LU is suitable for investors with a tolerance for the price volatility associated with technology stocks. Key Investment Positives · Focus on network solutions. We believe that Lucent’s position as the leading provider of carrier networks to telecommunications providers is the single best reason to own the stock. In our view, Lucent realizes that the future network is data and that voice will be a subset. The recent introduction of new Internet protocol (IP) products should enable Lucent to build the next generation of data/voice networks, as well as enable the evolution of existing networks, in our opinion. · Favorable demand trends. Growth in second telephone lines, global wireless system deployments, and increased software needs is holding up well, in our view. In addition, new nontraditional customers such as the competitive local exchange carriers (CLECs) are growing rapidly. · New products creating market opportunities. We believe that products from Lucent’s recent acquisitions have been well received. In our view, carriers worldwide are looking to their traditional central-office-switch and software providers to lead them to the next generation of infrastructure that will encompass voice, data, and video. · Recent IP acquisitions . . . Lucent recently agreed to purchase Nexabit, a privately held start-up developer of high performance IP wide area network switching equipment. This acquisition positions Lucent as a provider of next- generation IP networks. Also, Lucent plans to acquire Spring Tide Networks, a privately held developer of an IP Service Switch (IPSS). We believe Spring Tide is an important addition to Lucent’s access product line and enhances Lucent’s ability to provide one-stop shopping for converging communications networks. · . . . and recent optical acquisitions provide growth opportunities. Lucent has also announced acquisitions of two optical companies. The first, Ortel, is a provider of active optical components to community antenna or access television (CATV) equipment vendors. This deal strengthens Lucent’s presence in CATV markets, and gives Lucent greater control over laser production for metro dense wave division multiplexing (DWDM) systems. The second, Chromatis, is a provider of optical networking equipment for metro markets. This acquisition strengthens Lucent’s optical product portfolio with a best-in-class solution that we believe should appeal to Lucent’s regional Bell operating company (RBOC) customers. · Major contracts. Last year, Sprint announced that it expects to spend up to $700 million over the next three years for Lucent’s wireless equipment. Lucent also recently partnered with Sun Microsystems in a product and marketing collaboration to improve enterprise infrastructure. In addition, Lucent announced a $2 billion contract over five years with Winstar to build out a global broadband wireless network. Key Investment Risks · Size can be a hindrance in attacking opportunities. Management is cognizant of the need to move faster to take advantage of opportunities in telecommunications equipment markets, such as data transmission.

To: Walter Morton who wrote (6)	9/15/2000 3:59:06 PM
From: Maverick	Respond to of 62

ML:Spring Tide's Packet Switching the Next Wave Excerpts from Merrill Lynch Report: Packet Switching the Next Wave In pre-announcing weaker than expected revenue growth over the next several quarters, Lucent management pointed to the transition from traditional circuit switching to packet switching as being one of the culprits. Tuesday, Lucent announced that it was acquiring privately held Spring Tide Networks for 27 million shares or about $1.3 billion, which excludes the 4% Lucent already owns. The deal, which should close September 30, 2000, will be accounted for as a purchase, which we expect will be dilutive by about $0.01 in FY01. Spring Tide fills a gap in Lucent’s product line, and evolves their current position in remote access concentrators (RAC). The IP Switch 5000 provides concentration for VPN and higher layer services such as firewalls and can interconnect with wireless, broadband DSL, cable and traditional wireline. LU leads the RAC market through its dominance in dial-up modems. Furthermore, Spring Tide’s 5000 complements the systems acquired through Xedia and interoperates with LU products such as Stinger for DSL. This acquisition should help Lucent compete as operators migrate circuit switching to the next wave of packet switched networks. The market opportunity for this type of product is expected to be significant. Industry experts forecast the market at $660 million in 2000, and expect it to grow to over $5 billion in 2003. Spring Tide has established itself as an early leader in this market, which includes competitors such as Nortel’s Shasta unit. Spring Tide won four contracts through an LU OEM agreement including AT&T, Vanion, ionex, and Broadslate. The contract with AT&T may be worth more than $50 million. The company has about 200 employees, which also gives Lucent some much needed IP expertise. Other Changes on the Horizon With all of the company’s current difficulties, investors may be asking “why now?” We think the pace of technology change and the emergence of the VPN market would not allow Lucent to stand still, despite current challenges. The spinoff of Avaya and the announced plans to spin-off the Microelectronics Group are just first steps to streamlining and focusing the “core” businesses. Table 1: Lucent Segmentation ($ in millions) FY00 Rev. FY01 Rev. YoY Growth % FY00 Rev. % FY01 Rev. Wireless 6,600 7,689 17% 19% 19% Optical Systems 5,500 7,563 38% 16% 18% CO Switch 6,700 6,667 0% 20% 16% Carrier Data & Access 5,300 7,235 37% 15% 18% Software 950 1,088 15% 3% 3% Services 3,400 3,826 13% 10% 9% Remaining Micro (e.g. Power Sys.) 1,395 1,388 -1% 4% 3% Other 108 - -100% 0% 0% Total (minus ME) 29,953 35,455 18% ME (Semi & Opt El.) 4,336 5,720 32% 13% 14% Total (w/ ME) 34,289 41,175 20% Source: Merrill Lynch Estimates