Can Lucent Come Back?

Residents all over the northeastern United States reported seeing a mysterious giant fireball in the sky that exploded as it fell to Earth last week. It wasn't Lucent Technologies, but it could have been.

On July 24, the prominent telecommunications equipment maker, headquartered in Murray Hill, N.J., announced a quarterly loss of $3.25 billion, the cutting of up to 20,000 jobs — for a total of about 40,000 this year — and the elimination of its dividend.

And that was only the latest part of a spectacular flameout in 2001, as the once-soaring company struggles to remain airborne. Lucent has registered huge losses, fired tens of thousands of employees and unloaded divisions in a near-fire sale.

As a result, Lucent's widely held stock, which reached a high of nearly $78 in December 1999, is now hovering around $7. Far removed from being a market darling, the main question about Lucent now is whether the company can come back at all.

But Some Analysts Are Sanguine

Lucent's problem? Huge investments and spending, as well as loans extended to clients, are weighing it down now that the Internet-fueled telecommunications boom has sputtered. The company is also taking a $9 billion charge against earnings this quarter to cover investment losses and carries $3.7 billion in debt.

In an attempt to reduce this burden, Lucent just unloaded its fiber-optics business to Japanese company Furukawa for $2.75 billion. That is perhaps half of the figure Lucent had originally hoped to get.

Lucent even announced the $51 million sale of its company golf course in New Jersey this week — having spent $40 million purchasing and developing the links over the last three years.

But it also announced a delay in the initial public offering of subsidiary chip-maker Agere, a spin-off founded essentially to relieve Lucent of its crushing debt load.

Still, despite all the bad news, some Wall Street analysts are fairly sanguine about Lucent's prospects. The stock rose slightly late last week, thanks in part to a favorable research report by analyst Steven Levy of investment bank Lehman Brothers in New York, who upgraded his rating of the stock from "neutral" to "strong buy."

"The fact that Lucent was able to produce almost the same revenues as it did in the March quarter … was particularly encouraging," wrote Levy. In his view, the company has "share price appreciation potential that is at least 100 percent from current levels." Still, that might be only a minor comfort to those who bought the stock closer to its peak.

Layoffs Will Cut Costs

Last week's layoffs were hardly the first step Lucent has taken in its search for profitability. The company has been slashing its workforce since late last year in an attempt to cut its burn rate. The 40,000 jobs cut in 2001 is the biggest single-year reduction since Lucent's former parent company, AT&T, cut roughly the same number in 1996.

According to Lucent spokesman John Skalko, the company had 155,000 employees at its peak, in July of last year. With the layoffs — which include jobs in divisions the company has sold — he estimates Lucent could be down to 56,000 by the end of 2001.

Some observers say it is a necessary move.

"I think it's prudent," says Paul Sagawa, an analyst at Sanford C. Bernstein in New York who covers telecommunications equipment makers.

Additionally, the company seems to have stopped looking for a buyer. French telecommunications firm Alcatel was close to a merger with Lucent in May, but the deal failed in a dispute over control of the proposed new company.

"Who's going to buy them?" asks Sagawa, noting it would take a large, diverse company — along the lines of General Electric, say — to both afford Lucent's assets and take advantage of them. Instead, he feels Lucent should concentrate on what is now its core business, selling fixed-line switches and wireless equipment to big phone companies: "Now they just have to execute what they said they were going to do."

And Lucent still has valuable assets like its famous research center, Bell Labs. Chief executive Henry Schacht has promised Lucent will "maintain the core" of Bell Labs in its efforts to carry on as a productive "research and development house."

Bell Labs Timeline

2003: A Telecom Odyssey

The problems Lucent is facing are hardly unique, however. So far, 2001 is shaping up as a year of historically bad magnitude in the industry, and Lucent's layoffs and losses were just part of a week of carnage among telecommunications equipment makers and their employees which may have marked its nadir.

JDS Uniphase, for instance, announced a quarterly loss of $7.9 billion and 7,000 job cuts in addition to 9,000 layoffs made earlier in the year, on top of a $44.8 billion write-off based on the lower value of companies it has acquired — one of the biggest in corporate history. Nortel announced a $19.4 billion quarterly loss on July 19 and Corning Inc. announced a $4.76 billion loss, based on two large write-offs (although it reported increased sales).

"We're in a situation of survival mode," says Sagawa, who says he does not expect an upturn in profits for the big telecom equipment makers until 2003. He adds: "None of them are generating any cash, and they're carrying tremendous debt. You can either generate cash or stop spending."

So for now, the telecom equipment makers are trying to control their burn rates, before they simply burn out and crash.