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Lucent Technologies CEO Rich McGinn has spent the last six months restructuring the telecom equipment giant in the wake of a devastating revenue shortfall in January. He has invested billions to expand its might in crucial markets for next-generation equipment, where rivals Nortel Networks and Cisco Systems are clobbering Lucent. And he has announced plans to spin off a sluggish unit that makes telecom equipment for corporate offices. Now get ready for his biggest move of all.
Lucent plans to spin off its Microelectronics unit in a deal worth up to $40 billion, Business Week Online has learned. The unit makes computer chips, lasers, and other tiny components used in optical communications systems, which speed information across glass fibers at the speed of light. Revenues are expected to grow 20% this year, to about $3 billion. Lucent would remain in the optical-systems market, while the independent Microlectronics business would supply parts to Lucent and its rivals. Plans for the spin-off are still subject to change, people close to the company warn. But an announcement is strongly expected within weeks. Lucent declined to comment.
Lucent is trying to capitalize on the success of companies such as JDS Uniphase. Shares of that Silicon Valley optical-components company have soared 49% this year, despite the general malaise in tech stocks. That's because the highly competitive optical-systems market is booming -- revenues are expected to grow 46%, to $23.6 billion, this year, according to Robertson Stephens. Lucent, Nortel, and other rivals are buying up as many chips and lasers as they can, and suppliers such as JDS Uniphase will thrive regardless of who wins.
NOT SAYING NO.
The Lucent spin-off would provide some major relief for shareholders. The stock is down 22% for the year. Analyst Greg Geiling of J.P. Morgan, who issued a note last week speculating on the likelihood of the spin-off, says the move "would be extremely positive for shareholders." He also says Lucent Executive Vice-President Bill O'Shea did not discourage the idea of a spin-off when questioned about it during a meeting last week at the SuperComm trade show.
Many analysts have been clamoring for the spin-off for years. The deal would free investment capital and help the company focus on crucial markets such as optical systems and Internet routers. Furthermore the company could easily arrange to buy components on the open market. It's rivals are managing just fine without in-house suppliers.
But the move is bound to weaken Lucent overall, say some analysts. "In the short term, the spin-off would boost shareholder value. But I question whether it would be made at the longer-term expense of the company," analyst Martin Pyykkonen of CIBC World Markets says. Furthermore, having an in-house parts supplier can have big benefits. For example, Motorola views its computer-chip business as a valuable link to customers. While Microelectronics should do fine on its own, McGinn still faces plenty of challenges at Lucent.
By Steve Rosenbush in New York
EDITED BY DOUGLAS HARBRECHT
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