With Alcatel deal buried, what is Lucent's future?

Ben Klayman

CHICAGO: With its $23 billion deal to merge with French telecom equipment

giant Alcatel dead, struggling Lucent Technologies Inc. must cut costs and slash

up to 20,000 more jobs to solve its problems alone, analysts and portfolio

managers said on Wednesday.

"Lucent has to go back to the drawing board, they have to focus on

getting their cost structure down, maximizing revenues in a very difficult

operating environment, just a return to basics," Josephthal & Co.

analyst Lawrence Harris said.

Murray Hill, New Jersey-based Lucent must get back to basics, analysts and

portfolio managers said. That means selling its fiber-optic cable unit for an

expected $5 billion, accelerating layoffs and other cost-cutting moves,

introducing new products and possibly shifting more production to outside

contract manufacturers.

"It's back to where we were a couple of weeks ago, and the blocking and

tackling that people think is necessary," Merrill Lynch analyst Michael

Ching said. "Unfortunately, one of the issues with this merger is that it

potentially delays the turnaround that we're all anticipating for Lucent down

the line," he added. "The management team very likely was distracted

to a certain degree by these merger discussions."

Lucent and Alcatel on Tuesday called off their deal, which would have created

a global telecom equipment powerhouse with about $53 billion in annual sales and

about 235,000 employees. The companies couldn't agree on board representation,

the new firm's name or questions about Lucent's legal liabilities, sources close

to the deal told Reuters. Lucent's stock fell 18 cents, or 2 per cent, on

Wednesday to $8.14 in New York Stock Exchange trading. It is 88 per cent below

its 52-week high and over the past year has underperformed the Standard &

Poor's 500 index by 85 per cent.

Slowdown hurting rivals too



Analysts said Lucent's turnaround is all the more challenging because of the
severe slowdown in customer spending that also has hit such competitors as Cisco

Systems Inc. CSCO.O, Nortel Networks Corp. and ADC Telecommunications Inc.

ADCT.O

The tougher environment is likely to drag on for several more quarters, they

said. Lucent is also operating under internal pressures as its credit agreements

require it to raise $2.5 billion in nonoperating cash by the end of its fiscal

year in September, making the sale of its Atlanta-based fiber-cable unit almost

a must, analysts said. Lucent also plans to spin off the rest of its stake in

optical components maker Agere Systems Inc. AGRa.N by then.

Lucent executives must lay out a clear strategy to Wall Street for how the

company will survive going forward, J P Morgan H&Q analyst Greg Geiling

said. "The mere fact that they were willing to sell themselves without a

premium brings up the question in investors' minds whether the management team

doubts their ability to survive as a stand-alone entity," he said. While

Lucent officials will not discuss the breakdown of the merger talks, they said

the turnaround is on track.

"We've got a team that is focused and driven on pushing ahead on this

turnaround. That has not changed," spokesman Bill Price said. He noted that

second-quarter revenue was higher than first-quarter levels, and said Lucent has

secured new credit agreements and paid off some debt with the partial spin-off

of Agere.

"Take the money, reduce debt, get all the (short sellers) off their

back," said Richard Steinberg, president of Steinberg Global Asset

Management, a Florida asset management firm that owns 126,500 Lucent shares and

was against the deal.

Fear and relief in jersey



At Lucent's suburban New Jersey headquarters, feelings were mixed after the
deal's death, company insiders said, citing fear as well as relief the company

will retain its identity. Ultimately, Lucent officials did not feel they were

merging with Alcatel out of weakness. "You only walk away from this kind of

a situation feeling you can go it alone and that you're not afraid to go it

alone," a source close to the talks said.

However, independent telecom industry analyst Jeff Kagan said Lucent remains

in play. "Only a fool would think other companies are not looking at

it," he said. "I'll lay odds we'll see other suitors in there.

"It's a story of two Lucents," he added. "The company is still

a good, strong company as far as products and service, but the financial legs

that it stands on are wobbly because of bad management decisions." In the

near term, Lucent needs to refocus on its restructuring efforts, including

speeding up cost-cutting efforts aimed at $2 billion in annual savings, analysts

said.

It also needs to complete the sale of the fiber-cable business, a unit in

which Alcatel and Italy's Pirelli SpA PIRI.MI previously have expressed an

interest. After the deal's collapse, Alcatel officials would not say whether

they will still bid on Lucent's fiber-cable unit, and Pirelli declined to

comment.

Other possible bidders on the fiber-cable unit include Corning Inc., General

Electric Co., Tyco International Ltd. TYC.N, Japan's Furukawa Electric Co. Ltd.

and Canada's JDS Uniphase Corp., analysts said.

While it is not likely another firm will make a run at Lucent, many would

love pieces of it, analysts said. For instance, they said Finland's Nokia, the

world's No. 1 maker of cell phones, would love Lucent's wireless infrastructure

business.

Lucent also probably needs to cut another 20,000 jobs, analysts and portfolio

managers said. Lucent employed 104,000 people at the end of March, with plans in

place to reduce that total to 90,000 by the end of September.

New products are also needed to generate revenue, said analysts, who expect

Lucent to unveil a whole new series of products, especially in optical

networking, at the Supercomm industry conference next week in Atlanta.

(C) Reuters Limited 2001.