Lucent Faces Growing Pressure
Over Its Pricing of Agere's IPO
By SUZANNE MCGEE and DENNIS K. BERMAN
Staff Reporters of THE WALL STREET JOURNAL
There is a tug of war under way on Wall Street, with the fate of what possibly could be the second-largest U.S. IPO at stake.
Potential investors in Agere Systems Inc., a planned spinoff of Lucent Technologies Inc., are urging underwriters to cut the price of stock being offered in the initial public offering next week below its current range of $12 to $14 a share, which already has been reduced from $16 to $19 a share.
Late Thursday afternoon came the first hint that another reduction in the price range might occur when money managers were contacted, unofficially, by members of the underwriting group soliciting their opinions about a range of just $8 to $10. But people familiar with the IPO say no official decision on whether to lower the range further will be made until later Friday.
The selling of Agere comes amid a tough climate for IPOs. Loudcloud Inc., another high-profile IPO that was sold last week, was a hard sell for Wall Street, and is now trading at $5.13 a share, less than its $6-a-share offering price. While technology and telecommunications offerings once were lapped up by eager investors, they now are among the most difficult for underwriters to sell.
So far this year, according to data from CommScan LLC, 18 IPOs have been completed, raising $3.27 billion of proceeds. That compares with 96 IPOs in the same period a year ago, when $14.89 billion was raised from public-market investors.
Investment bankers involved in the Agere transaction -- many of whom extended hundreds of millions of dollars in loans to either Agere or Lucent -- are trying to resist the pressure. They believe rivals and money managers are attempting to undermine the offering because they own competitors of Agere. Also, they say money managers are talking to the press to try to put pressure on them to lower the price and give investors a bargain.
Certainly, Agere can boast some strengths. Its businesses, particularly the opticals-networking side, have tremendous potential, and the firm already is an established competitor. Over the long haul, as the market revives, it could be a formidable force in its business segments, says Bruce Bartlett, a growth-stock investor at Oppenheimer Funds. And investors praise the company's management team as savvy and skillful.
Agere Underwriters Change Proposed Terms of Offering (Feb. 26)
Lucent Deal Shows Street Is Taking on Greater Risk (Feb. 23)
Lucent's Agere Systems Plans Large Initial Stock Offering (Feb. 8)
There is a lot at stake. If the deal goes ahead at its current price, it would raise $6.5 billion for Lucent, becoming the second-largest IPO in U.S. history after last spring's $10.6 billion offering of tracking stock in AT&T Wireless Group. Lucent initiated the plans for the Agere spinoff last summer for strategic reasons, but now needs to pursue the IPO as part of its own effort to reduce debt on its balance sheet and raise cash. If the offering is canceled, Lucent's credit rating could fall to below investment-grade, or "junk-bond" status.
Lucent remains unbowed. "We continue to move forward with our plans for the IPO to occur by the end of the month," said spokeswoman Michelle Davidson, who declined further comment.
Jim Houlton, manager of the Strong Internet Fund in Milwaukee, says the offering is overvalued. Mr. Houlton, who met with members of Agere's management team Thursday, says there is little confidence among potential investors in the prospects for long-established public companies in Agere's two businesses, semiconductors and opticals-networking components. In the first category, its competitors are firms such as Texas Instruments Inc., whose stock has fallen some 60% during the past 12 months as business has soured.
Opticals stocks, meanwhile, have plunged as investors responded to a likely cutback in telecom-equipment spending. Shares of rival JDS Uniphase Corp., a one-time highflier, have seen 80% of their value vanish during the past 12 months.
That has led some investors, such as Erik Gustafson of Stein Roe & Farnham, to just say no to the Agere deal. "We're not buying telecom equipment or service stocks right now," he says bluntly. "No way."
With that in mind, and given the fact that stock indexes already are down sharply so far this week, it is little wonder that underwriters are grabbing the chance to postpone the pricing by a few days. Scott Schermerhorn, co-head of value investing at Liberty Funds Group in Boston, received a call from a banker Thursday afternoon telling him the IPO wouldn't be priced at least until Wednesday, as underwriters had apparently decided to wait until after Tuesday's meeting of Federal Reserve policy makers concluded. Mr. Schermerhorn earlier had been told the pricing was to be done Monday.
"Maybe they're hoping that there will be an interest-rate cut that will help the deal go better," Mr. Schermerhorn says. "I've certainly never seen an IPO done like this. Maybe it's a sign they're having trouble building the book."
A person close to the underwriting group, however, said the Agere deal was always planned to go "during the week of March 19," not necessarily on March 19.
The terms of the IPO -- which has been planned since last July -- already have been altered to respond to the changing market. Originally, Agere's underwriters planned to sell 370 million shares, but now the plan is to sell 500 million shares.
The deal's structure isn't the only thing changing. Last week, underwriters, led by Morgan Stanley Dean Witter, reworked the model on which they based their forecast of Agere's business prospects to reflect the deepening industry malaise. The result: a trim in the revenue forecasts.
People close to the offering say underwriters now predict Agere's revenue will grow by only 5% in its current fiscal year, ending Sept. 30. In the previous year, revenue grew 27% to $4.76 billion, according to the IPO prospectus. Revenue at Agere's integrated-circuits business is expected to slip 5% in the current year, while opticals-electronics revenue should grow 33%, those individuals say. Agere itself has yet to provide long-term public guidance for its prospects, other than to say it likely will report a "significant" operating loss for the fiscal quarter, ending March 30.
The deal is an important one for Lucent, since it culminates a series of complex transactions meant to right the company's finances. With the market for telecom equipment weakening across the board, Lucent already has posted a $1 billion loss for its first fiscal quarter and, analysts say, likely will continue to incur losses for the rest of the year, if not longer.
Lucent pledged its Agere shares as collateral for a crucial $6.5 billion line of credit from banks last month. The IPO's successful completion would mean Agere would take on $2.5 billion of the new bank line. Morgan Stanley Dean Witter holds more than $2 billion of Lucent's debt. According to the terms of the agreement, Morgan Stanley can take as much as $2.5 billion of debt and swap it for Agere stock, which then be can sold on the market.
But Lucent's eagerness to complete the deal -- and the IPO's giant size -- plays into the hands of investors hoping to land a bargain.
"They'll have to bring the price range down more, especially since they're bringing the business forecast down," says Craig Chodash, a growth-stock fund manager at J&W Seligman in New York. "It's a buyer's market. What we're willing to pay for it based on our sense of its valuation and outlook is what they'll get."
Many investors expect underwriters to go ahead and trim the price range to $10 or less, and don't expect to end up paying more than $8 a share, a price that would be about 20 times Agere's expected earnings this year.
"The reality is, there are a lot of cheap, good companies that are already out there," says Alan Lowenstein, a money manager at American Fund Advisors in Garden City, N.Y. "If I can buy Cisco [Systems] at $18 or $20, well, I'm probably going to have more confidence in their ability to deliver in a technology recovery than I will in any IPO."
we're talking ugly stick here |
