For Lucent, No Easy Options


Analysts cheered on June 5 when Lucent Technologies Chairman and CEO Henry Schacht indicated that the ailing telecom-equipment giant would show a modest improvement in revenue for the third period over the previous quarter, which ended on Mar. 31. Although the company will lose billions of dollars in the quarter, the promise of slight revenue growth was enough to offer a glimmer of hope that its long-awaited turnaround is beginning.

Beginning is the operative word, however. Even as it completes the 10,000 layoffs it announced earlier this year, Lucent (LU) still needs to sell off its fiber-optics unit in order to raise $2.5 billion to stay in good standing with its lenders.

It also needs to complete the spin-off of its optical electronics unit, Agere Communications (AGRA.A), by September, under the terms of an initial public offering that Agere completed this spring. Schacht also implied on June 5 that the company's restructuring efforts will only intensify in the coming weeks. If that leaves Lucent execs with any free time, the company is also looking for a new CEO to replace Schacht, who is in the post temporarily.

REPOSITIONING? In addition to seeing this plateful of projects completed, investors want one more thing from Schacht & Co.: A strategic vision for Lucent's long-term future. Right now, much of the phone company equipment the former AT&T unit manufactures is outdated. Going forward, Lucent could try to transform itself into an advanced technology company on the order of networking giant Cisco Systems.

Or it could become a services-intensive company, like computing heavyweight IBM (IBM) and Juniper Networks (JNPR), and thus cater more to the customers its prizes most -- the world's largest phone-service providers.

Whichever goal Lucent chooses, there's one other burning question: How it will get there? Lucent executives are tight-lipped about their strategic alternatives, mainly, industry insiders believe, because they don't yet know which course to take.

Logically, however, they seem to have three primary options now that their proposed $24 billion merger with France's Alcatel has fallen through because of disagreements over who would run the merged company. Lucent could remain independent, seek a new buyer, or file for Chapter 11 bankruptcy protection. Here's how each of these scenarios might play out:

Staying Solo:

Schacht believes that Lucent can weather the bad times alone. But a turnaround of the magnitude Lucent needs would require a new management team to come in, take a fresh look at the company's problems, and attack them with utmost haste, says Lehman Bros. analyst Steve Levy. "They put the search on the back burner for awhile, but now it will be on front burner," says Levy, who has a neutral rating on the stock, which in the last year has dropped from $67 to $8-and-change.

Executive search firm Spencer Stuart has been looking for a new Lucent CEO for months (previous CEO Richard McGinn was ousted in the fall, and Schacht says he stepped in to take his place only temporarily), but no definite candidate has emerged yet.

One reason could be a lack of candidates who could do the job -- or who would want to, says Jeff Christian, CEO and chairman of Christian & Timbers, the executive recruiter that found Carly Fiorina for the CEO spot at Hewlett-Packard. Spencer Stuart declines to comment, but Christian adds: "They've got the worst of all worlds, based on the marketplace being down. It isn't the most attractive place to go."

More troubling, Christian says, is that, "I'm not sure there's an official search under way" (though Lucent says there is). Possibly, Christian speculates, Schacht wants to wait to bring in a new CEO until the storm has passed and the company has a clear strategy. Or perhaps Schacht wants to be CEO and guide the turnaround, though he denies such talk.

No matter who is holding the reins, the first priority will be to get Lucent customers to pay what they owe. At the end of March, the company had a hefty $6 billion-plus in accounts receivable. Some of those bills might never be paid, because the company lent so much to upstart telecoms that are now facing insolvency. That's one of the reasons Lucent could have trouble meeting its debt requirements by September. If the company doesn't manage to do that by selling its fiber-optic unit within a few months, any plan to stay independent might have to go into the trash.

Playing Dead:

On June 5, Schacht called the sale of Lucent's fiber-optic unit "imminent." But the division, according to analysts, has lost as much as half its value in the past few months -- both because it has been on the market so long and because it's clear that Lucent is selling into a buyer's market. Corning, Alcatel, and Furukawa Electric have been rumored to be among the bidders for the unit, which is expected to fetch between $3 billion and $5 billion, according to Lehman Bros. estimates.

If the sale doesn't go through, however, Lucent will enter a liquidity crisis that will dwarf its current problems. Lucent's debt is already viewed by many to be close to junk-bond status, says Glenn Reynolds, CEO of CreditSights, an independent credit-research firm. If Lucent slips into junk-bond territory, then filing for Chapter 11 protection would become a real possibility -- if its lenders decided to force the issue.

Schacht would do just about anything to avoid that, as the public-relations black eye would would further impair Lucent's ability to sell products. "Based on our assessments, there's extremely little risk of a liquidation crisis," says Levy of Lehman Bros.

Yet, bankruptcy protection could give Schacht some breathing space -- if only to entertain buyout offers similar to the one from Alcatel. "It would [still] be looking for merger, but with less obstinacy," says Reynolds, referring to the failed Alcatel deal.

Finding a Buyer:

Of course, finding another buyer pronto would be the easiest way to deal with the September deadline for new cash. Potential buyers could once again include Alcatel, plus Swedish telecommunications giant Ericsson. "It's clear," says Reynolds, "that there's interest in the company."

"In six months, it could revisit a strategic merger," agrees Lawrence Harris, analyst with Josephthal & Co. "And cost-cutting [between now and then] would perhaps make it more valuable." Of course, by that stage, Lucent could also be more desperate -- and tempted to settle for any reasonable offer on the table.

One problem with selling out is that it could plague the company with tax problems, says analyst Robert Willens of Lehman Bros. Under federal tax rules, Lucent would have to prove that an Agere spin-off and the merger weren't part of a broad, integrated plan to restructure the company.

Otherwise, the Agere spin-off would be taxable -- not to Lucent shareholders but to the company. If Agere is valued at $12 billion, Lucent would have to pay as much as $4 billion in taxes on the proceeds of a sale, says Willens. Still, considering Lucent's delicate condition, Willens thinks the IRS would probably let Lucent avoid such a huge liability if it had to rule on the matter.

Whatever form Lucent's future takes, the key to its resurgence is revenue growth -- and analysts aren't sure when that might happen. The company, which recorded revenues of $33.6 billion last year, is expected to post revenues of only $25.7 billion this year, down nearly 25%, according to Lehman Bros.

The earnings picture doesn't look much better. Lucent posted earnings from continuing operations of $3.4 billion, or 93 cents per share, last year. But in 2001, its loss, based on the estimates 27 analysts surveyed by First Call, will be around $2.3 billion, equal to a loss of $1.05 per share. Not surprisingly, most analysts surveyed by First Call rate Lucent a hold -- in the parlance of Wall Street, that means sell.

One way or another, Lucent execs "will be forced to make a decision by the fall," says Geoffrey Champion, president of the global advanced technology practice at Korn/Ferry International, an executive search firm. By then, the company's financial position will either have improved significantly -- or it'll be in heightened crisis mode. Which brings to mind another piece of Street jargon that Lucent execs should heed: Better think fast. By Olga Kharif in New York


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