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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. |
