5/8/98 SmartMoney. Who's on Lucent's Shopping List? [ASND and Nokia most likely]
smartmoney.com
IT IS THE AGE of the mega merger:
Chrysler (C) and
Daimler-Benz
(DAI), Citicorp
(CCI) and
Travelers (TRV),
WorldCom
(WCOM) and
MCI (MCIC),
Lucent
Technologies (LU)
and....
Did you miss
something? No,
because a massive
deal involving the
former telecom
division of AT&T
(T) hasn't
happened, at least
not yet. But on Oct.
1, the two-year
anniversary of its
spinoff from AT&T, Lucent will be officially free to pool
stock when making acquisitions.
That accounting change will give the company tremendous
buying power: Lucent shares have appreciated roughly
315% since the spinoff. At around $73 a share, Lucent's
$95 billion market cap now rivals that of AT&T.
"Post-September, they could do a big one," says
BancAmerica's equipment analyst Paul Johnson, referring to
the merger prospect. "They could do a $10, or $12 or $15
[billion dollar buy] easy, which would be hard to do with
cash."
Under pooling of interest accounting, Lucent will simply be
able to merge its balance sheet with the company it is
acquiring. Now the company must record the buy as a
purchase, as it has done with its many acquisitions so far,
including last week's $1 billion acquisition of networking
equipment firm Yurie Systems. But with pooling of interest,
Lucent will not have to borrow cash for the buy and, more
important, it will not have to write down the goodwill on the
acquisition against its future earnings. The Yurie purchase,
and even last summer's $1.8 billion acquisition of Octel
Communications, are peanuts when you consider that
without fear of having to write off massive goodwill for
expensive tech stocks, Lucent could more easily consider
buying a much larger concern.
Acquisitions aren't the only trick up Lucent's sleeve. On Feb.
18, the company announced the formation of a $100 million
venture capital arm, dubbed Lucent Venture Partners, to be
run by retiring chair Henry Schacht. Its goal is to fill gaps in
Lucent's portfolio in a number of areas, including wireless
networking, semiconductors and software. Lucent is
pursuing the fund entirely as an internal operation, without
outside venture capital involvement.
So who's on Lucent's shopping list? The answer depends on
why you believe the company even needs to buy another
firm. Unlike Ma Bell of old and its ill-fated acquisition of
mainframe computer-maker National Cash Register in 1991,
Lucent has a quest that isn't about just being bigger. This
time around, say Johnson and other analysts, Lucent is
fighting for the very survival of its business. As WorldCom
(WCOM), Qwest Communications (QWST), and the
regional Bells and telecom firms throughout the world
remake their networks to serve the flood of Internet and
corporate data traffic, the phone switches Lucent sells to
these outfits are at risk of becoming obsolete. With packets
of data gaining the upper hand on voice signals, Lucent
ultimately faces competition from Cisco Systems (CSCO)
and other aggressive data networking firms as the line
between the world of telecom equipment and that of Internet
routers disappears.
In that scenario, Lucent's choices are limited but clear: Find
a first-class telecom or networking company that will allow it
to compete against the likes of Cisco. We zeroed in on three
large firms and one smaller one that would make excellent
strategic fits: Ascend Communications (ASND), Nokia
(NOK/A), Bay Networks (BAY) and P-Com (PCMS).
There are, of course, many other possibilities, especially if
Lucent decides its first priority is the international telecom
market, rather than routers and switches or even Internet
telephony. But whatever the nature of Lucent's acquisitions,
most observers seem to agree that the company's path will
bring it more and more into direct competition with Cisco.
The two are edging closer to one another every day, with
both companies this week making major announcements
about upcoming products for high-speed modem technology
known as Digital Subscriber Line (DSL).
Unlike AT&T, Lucent has made vast strides in responding to
changes in the marketplace; however, it is still not as nimble
as its data networking competitors. But analysts say the
ability to build on its acquisitions through its Bell Labs
division, and the semiconductor resources of its
microelectronics unit, could put the company far ahead of
Cisco when it finally shores up its data networking
background. John Armstrong, principal networking analyst
with market research firm Dataquest, points to Lucent's
expertise in many fundamental parts of networking silicon,
such as sophisticated chips for 10/100 Ethernet networking.
"Lucent, with its tremendous R&D capability, and its
tremendous manufacturing prowess, could do significant
damage to Cisco," says Armstrong.
At the end of the day, Lucent's strongest asset in its battle
against Cisco and the more agile data networkers, could be
its corporate transformation since the spinoff. As of
Wednesday, sources close to the company were talking
about the prospect of a strike in the next couple of weeks by
members of the telecommunication workers union, who are
currently renegotiating the terms of their contracts. Analysts
we spoke with, however, discounted the possibility of a
strike, saying Lucent has put in place bonus, stock option
and profit sharing plans that have galvanized its employees to
focus on benefiting personally from the rapid rollout of new
products.
"Lucent probably best emulates the Silicon Valley business
model, and its stock price is quite rich right now," says one
analyst. "Management is running the company more as an
entrepreneurial shop." It may not be the equal of Cisco in
Internet Protocol gear. But Lucent has already figured out
the Cisco management model, and that could make all the
difference.
NEXT>>
-- By Tiernan Ray
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