Even in the red-hot telecom-equipment market, Lucent Technologies Inc. has been a star. Still, CEO Richard A. McGinn hasn't hesitated to point out Lucent's weaknesses, conceding that it needs to offer better gear for data networking and participate more aggressively in overseas markets. The simple solution would be to buy companies that fill those strategic holes.
Until now, however, McGinn has been limited in his ability to do that. Despite Lucent's soaring stock, up sixfold to $80 a share since its public offering in 1996, the company hasn't been as free as rivals such as Cisco Systems Inc. to use its shares as acquisition currency. The reason: Accounting rules bar spin-offs such as Lucent--formerly a unit of AT&T--from using an accounting method called "pooling of interests" for deals until they have been independent for two years. Pooling lets companies avoid taking charges against earnings to write down "goodwill"--the price above book value they pay. Lucent's second birthday is Oct. 1.
PLUGGING HOLES. So what will Lucent buy itself as a gift? The company won't comment. But investors and analysts are buzzing about possible targets, including networking-equipment maker Ascend Communications, France's Alcatel, and Finland's Nokia. With a market capitalization of more than $100 billion, Lucent could pull off deals that would set records in an industry already marked by merger mania. Targets could include Ascend, with a market capitalization of $9 billion, or even Nokia, valued at $48 billion. "Everybody's sort of holding their breath to see what Lucent will do," says William Schaff, chief investment officer at San Francisco-based Bay Isle Financial Corp., a Lucent shareholder.
Lucent is actively looking at networking and international deals, according to two investment bankers who have talked to company executives. William O'Shea, the head of Lucent's data-networking group, is spearheading the networking initiative. Ben J.M. Verwaayen, Lucent's co-chief operating officer, is trolling for global deals. Lucent has used Goldman, Sachs & Co. or Morgan Stanley Dean Witter for big deals in the past but does not have an exclusive investment bank this time, the bankers say.
Lucent's most immediate need is for data networking. The market for data gear is growing 25% a year, says BancBoston Robertson Stephens, about double the traditional telecom-equipment market. And Lucent is weak in two fast-growing areas: asynchronous transfer mode (ATM) and Internet protocol (IP) routing technology.
That's where Ascend comes in. The Alameda (Calif.) company is the market leader in ATM and has some IP routing expertise. "That's not rocket science," says Mark Dicioccio, a managing director and head of Lehman Brothers Inc.'s telecom-equipment practice. "Ascend is pretty much the last one standing." Ascend says it plans to remain independent but would listen to an overture. If Ascend balks, Lucent could target other networking companies such as Newbridge Networks, the No.2 ATM player.
Overseas, where Lucent generated only about $6 billion of its $26.4 billion in 1997 revenue, bankers say the strongest candidate would be Finland's Nokia Corp. Nokia would give Lucent expertise in Europe's most popular wireless technology and would provide valuable customer relationships in some 45 countries. Nokia declined comment.
Several other companies would also help in foreign markets. France's Alcatel has operations in 130 countries and growing data expertise. But the company, which declined comment, may resist a takeover, and Lucent is unlikely to attempt a hostile deal. Siemens' telecom unit would also give Lucent greater international reach. But a spokesman for Siemens says it would not sell the telecom business on its own.
How soon will Lucent make its move? It can't have substantial negotiations before Oct. 1 without running afoul of accounting guidelines. But McGinn has a head start--the shopping list he has been carrying around for two years.