THREAD --- Forget BARRON'S --- This why we are in LU---A great article ! Lucent Builds Through Buying
(05/01/98; 8:05 p.m. ET)
By John T. Mulqueen, TechWeb
Think of Lucent Technologies as a stodgy 125-year-old telephone equipment manufacturer? Think again. The vendor is acting like a Silicon Valley start-up -- albeit a very big, wealthy one.
That role reversal rang true more than ever this week, when Lucent (company profile) disclosed its planned $1 billion cash acquisition of Yurie Systems for its Asynchronous Transfer Mode (ATM) and voice/data technology.
Since its $3 billion initial stock offering in April 1996 -- the largest in U.S. history -- Lucent's shares have shot up to more than $75 from $13.50, adjusted for a two-for-one split. In the 15 months prior to the Yurie deal, the company spent $2.9 billion to acquire Agile Networks, Livingston Enterprises, Octel Communications, and Prominet Technologies.
In October, on the two-year anniversary of having been spun off from AT&T, Lucent will be able to use pooling instead of purchase accounting -- and thereby avoid a major earnings hit -- to make acquisitions. Once that limitation is lifted, the company is widely expected to spend as much as $30 billion, on one or more acquisitions.
The key questions are: Will IT managers buy into Lucent's vision, and who will Lucent target for acquisition?
For all its prowess in the carrier equipment and PBX markets, Lucent still has a recognition problem in the data networking world.
Andrew Thompson, director of telecommunications at a $13 billion electrical equipment manufacturer, said "I don't know anything about Lucent's data networking products." Thompson's employer does use Lucent private branch exchanges. His company uses Cisco switches and routers, and Bay Networks hubs. "I don't see any reason to take out what works," said Thompson, who did not want his company's name used.
Regardless of perception or recognition, Lucent's William O'Shea said the data networking market is too hot for the vendor to ignore. That market is growing as much as 25 percent annually, according to figures cited by the Lucent group president of data networking and business communications.
Some parts of the market are more attractive than others. Lucent is emphasizing intelligent switching, remote access products, and optical networking gear -- not routers, hubs, or adapter cards, where growth is slowing as those products edge toward commoditization.
Incumbent Networking Vendors Pose Challenge
Lucent faces formidable challenges from incumbent networking vendors, primarily Cisco, with its long track record of developing products faster than Lucent and pricing them lower. Northern Telecom also has a growing enterprise data networking business, and is on the acquisition hunt.
In addition to reselling other vendors' switches, Lucent is developing its own ATM products and expects to release a router sometime this year.
Most vendors realize acquisition is often the fastest and cheapest way to get products to market, and Lucent reportedly has been looking at Bay and Ascend Communications for more than a year. Either could give Lucent a major presence in desired data networking niches, but there are skeptics.
Todd Dagres, a partner at Battery Ventures, said Lucent wants to own the user connection from end to end, as Western Electric once did with the telephone network. To carry out that strategy, Dagres said 3Com would be a better fit.
Steve Levy, a former AT&T manager and now an analyst at Solomon Bros., thinks Lucent is primarily interested in WAN switches, not the desktop or LAN products that a company like 3Com would bring to the table.
Bay is too heavily involved in hubs and routers to interest Lucent, and it does not need Ascend's data termination gear now that it owns Livingston, according to Levy.
Even with the acquisitions, data networking so far accounts for only about $500 million of Lucent's $26.4 billion annual revenue, and some analysts think the company should stick to the carrier market.
Whichever way Lucent moves, its stock provides the currency for a big purchase. The company has a market value of more than $70 billion.
Not surprisingly, Richard McGinn, Lucent's 63-year-old chairman, is not letting on how he will spend that wealth. He will not make an acquisition that will seriously dilute Lucent's earnings.
Focus On High-Growth Segments
McGinn makes no bones that he will both buy companies and pour money into research to feed his hungry giant. In addition to the Yurie deal, Lucent recently spent $60 million to buy a German wireless software supplier.
"Right now, Lucent is investing over $3 billion in R&D, and the vast majority of that is focused on the highest-growth segments -- wireless, communications, semiconductors, data networking, hybrid networks, and access products associated with that," McGinn said in an interview.
Although McGinn has reorganized the company into 11 business units to focus on fast growth opportunities, he also has used Lucent's strong balance sheet to supply Sprint PCS with $1.8 billion in financing for the construction of its wireless network, which uses Lucent and Nortel equipment.
The strategy driving the company emerged after AT&T announced the spin-off of the former Bell Labs in September 1995.
Bart Stuck, a former Bell Labs engineer and now head of consultancy Business Strategies, credits McGinn for dividing Lucent into the new business units. Lucent has always been strong in technology, but the company was "relatively slow in getting product out to the market," Stuck said.
Bell Labs invented WDM for optical networks, only to let 3-year-old Ciena seize the lead in that area, he said.
Harry Boscoe, chief operating officer of the optical networking group at Lucent, admits the company missed the early market on the 16-channel DWDM equipment. But he said it is learning from the misstep.
Lucent has announced a new system that will support as many as 80 channels that can carry a total of 3.2 terabits of traffic. Ciena has announced a product with 40 channels that can handle 96 gigabits, for delivery later this year.
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