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(COMTEX) A: Lucent Spinoff Marks Communications Market Shift
Jul 24, 2000 (Tech Web - CMP via COMTEX) -- Pounding another nail into the
coffin of the vertical integration business model, last week's spinoff of Lucent
Technologies' Microelectronics Group has unleashed a new set of competitive
dynamics in the ever-changing communications market.
When it makes its debut early next year as a separate entity, Lucent's
semiconductor and optoelectronics group will be free toforge previously
forbidden alliances, enter new markets, and even court its former parent's
rivals more aggressively.
And as a publicly traded company, the nimble new microelectronics outfit will
attain heightened access to the stock market through which it can raise funds
for acquisitions, attract key personnel, and fuel its growth. Lucent (stock:
LU), meanwhile, will focus on solidifying its position in the $225 billion
network equipment industry.
At least that was the consensus last week when the Murray Hill, N.J.,
communications powerhouse unveiled its much awaited plan to spin off 20 percent
of its Microelectronics Group in an initial public offering and distribute the
remainder tax-free to Lucent stockholders.
Based solely on the rationale of company executives and analysts, there were
many compelling reasons for Lucent to float the unit as a separate venture.
Beyond the immediate impact it will have on the parent company, however, the
transaction is likely to have far-reaching implications for other electronics
industry players, especially competing telecom OEMs and communications IC
suppliers, analysts said. Shorn of conflicting links with Lucent, the $4 billion
microelectronics juggernaut will have enough design, engineering, and
manufacturing expertise to attract the patronage of OEMs such as Cisco Systems
(stock: CSCO) and Nortel Networks (stock: NT).
"Nortel and Cisco equipment design engineers may be more likely to select Lucent
Microelectronics products from an entity separate from one of their biggest
competitors: Lucent's systems business," said Joe Osha, an analyst at Merrill
Lynch, New York.
The new company is not the only likely beneficiary of the spinoff, however. With
the microelectronic business gone, Lucent engineers are free to seek the best
technology and pricing offers from other communications IC providers.
"Companies like Vitesse, PMC-Sierra, Applied Micro Circuits Corp., and
TranSwitch Corp. would have an easier time competing for designs at Lucent's
equipment business if Lucent Microelectronics were a legally separate entity,"
Osha said.
What this means is a much different telecom and optoelectronic components
landscape within a couple of years as old barriers are removed and new alliances
are forged, Lucent executives said last week.
The microelectronics unit derives more than 75 percent of its sales from
outside, often from Lucent's competitors, according to Richard McGinn, chairman
and CEO of Lucent. The subsidiary's sales will shoot higher once it is no longer
seen as a part of Lucent, he noted.
"This new company will be able to accelerate its growth now that it's free from
this strategic conflict," McGinn said. "The communications infrastructure and
semiconductor markets have become so big, so fast-moving, and so competitive
that it's time to divide in order to accelerate growth."
That's quite a shift from McGinn's position only months ago. The strategic shift
has been long expected, however, and culminates a process in which vertically
integrated OEMs have stripped themselves to the bare essentials to better
compete. Lucent's latest action follows Siemens' spinoff earlier this year of
Infineon Technologies, its former DRAM and chip unit.
"More and more companies are realizing that having microelectronics entities
operate as separate companies makes sense," Merrill Lynch's Osha said.
One of the few remaining holdouts is IBM (stock: IBM), which has "absolutely" no
intention of setting loose its microelectronics division as a separate business,
a spokesman for the Armonk, N.Y., company said last week.
Lucent's management expressed a similar defiance not long ago. Even when reports
of a likely spinoff of the microelectronics unit first appeared barely two
months ago, Lucent denied the report and insisted that significant operating
synergies existed between its components and OEM businesses.
"When asked in the past, Lucent's management -- Rich McGinn, in particular --
has been fairly adamant in their assertions that they would not [spin off the
Microelectronics Group]," said Paul Silverstein, an analyst at Robertson
Stephens, San Francisco.
So what forced Lucent's top executives to change their minds? McGinn apparently
began singing a different tune as it became clear that Lucent's operations
needed a new direction, according to sources at the company. With its stock
trailing industry peers amid concern that rivals such as JDS Uniphase (stock:
JDSU) are carving up the optoelectronics landscape for themselves, Lucent
initiated plans to uncork its microelectronics business, analysts said.
The Microelectronics Group is now likely to get more business from "people who
do not want to buy from competitors unless their arm is twisted," said James
Stone, an analyst at Stifel Nicolaus & Co., Denver. "You will see customers
buying 10 times the amount [of optoelectronic products]."
Alcatel (stock: ALA), Cisco, Nortel, and Ciena (stock: CIEN) are "very
substantial customers to which we sell aggressively," said John Dickson,
executive vice president and CEO of Lucent Microelectronics.
"These companies will probably feel more at ease to do business with us on a
broader range than they do now," Dickson said. "We expect to see a degree of
revenue increases with those companies."
Dickson, who is spearheading the spinoff for Lucent, said the new company will
use its shares to buy companies that strengthen its technological position.
"It's a very significant requirement now to offer speed to market for our
customers, not only through the internal development of our own capabilities,
but to acquire technologies," Dickson said.
While the group recently boosted its presence through acquisitions in the area
of active optical components, Dickson said it needs to build a stronger presence
on the passives side.
"Strengthening our passives capabilities will be a significant goal," he said.
Besides the prospect of higher revenue, the microelectronics unit's true value
was obscured by the parent's wobbling shares, analysts said. The value of the
new company, which consists of optoelectronics and communications ICs, was
pegged at between $100 billion and $220 billion by Robertson Stephens'
Silverstein. Meanwhile, Lucent Technologies as a whole closed last Thursday with
a valuation of $176.5 billion.
"Lucent's optoelectronics business could trade with a valuation of over $100
billion using the low end of the range of comparables and over $150 billion
using the upper end," he said.
The remainder of the spinoff would yield a valuation of approximately $70
billion, Silverstein said.
News of the transaction did little to strengthen Lucent's stock price last week.
On Thursday, the company slid 16 percent, to 54 3/16 from 64 1/2. The latest
stumble, however, came on the heels of a report the company lost $301 million,
or 9 cents a share, in its fiscal 2000 third quarter ended June 30, compared
with net income of $763 million, or 24 cents a share, in the year-ago period.
The quarterly loss included a one-time charge of $863 million for "purchased
in-process research and development related to recent acquisitions," Lucent
said.
During the same period, the Microelectronics Group's revenue grew 39 percent, to
$1.81 billion, driven by almost triple-digit growth in optoelectronic components
and increased sales of optical fiber, power systems, and customized chips for
high-speed communications and data networking systems.
The downside? A potential negative effect of the spinoff for Lucent
Microelectronics is the possibility of increased competition from bigger
companies like Texas Instruments (stock: TXN) and STMicroelectronics (stock:
STM), analysts said. Also, the unit will no longer be able to depend on Lucent
for many of the advantages vertical integration provided in the past, they said.
"Is their vertical integration OK?" Stifel Nicolaus' Stone said. "I'm not sure
they gave as strong a response to this question as I would have liked. I see
allocations as a potential problem, but then again, a company with $4 billion in
revenue should be able to find the resources to take care of its own needs."
To counter some of these problems, Dickson said the new company will continue to
draw on the expertise of Bell Labs, Lucent's R&D arm. The approximately 3,000
Bell Labs engineers who work directly for the microelectronics unit will remain
with the company, he said.
"We also have access to core Bell Labs research facilities, and about 200 of
those researchers who are currently associated with the business will go with
the [3,000 engineers]," Dickson said.
It's not just the employees of Lucent's different units that will feel the
effects of these changes. Suppliers, customers, and competitors will also have
to adapt once the new company spreads its wings.
techweb.com
Copyright (C) 2000 CMP Media Inc.
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