Lucent may be shopping for a data networking acquisition

Journal Record, The (Oklahoma City), Mar 11, 1997 by Seth Schiesel N.Y. Times News Service

Lucent Technologies Inc., North America's telecommunications equipment leader, is not a significant data networking company. Yet.

Few industry analysts or executives expect Lucent to remain on the sidelines for long. That's because the $28 billion market for data network equipment is growing even faster than Lucent's core business: gear for telephone networks.

Henry B. Schacht, Lucent's chairman and chief executive, sees data networking -- which links computers and other electronic devices into corporate systems and public networks like the Internet -- as a natural, almost necessary, component of his company's future. No wonder so many people in the industry are looking for Lucent, the employer of 4,200 in Oklahoma City which had 1996 revenue of $23.8 billion, to attempt an acquisition that could quickly make the company a force in data networking. Lucent already has an agreement to develop products jointly with Bay Networks Inc., a Santa Clara, Calif., maker of equipment for the local-area computer networks used in business offices. And last fall, Lucent bought a small data networking company called Agile Networks Inc., for an undisclosed sum. But even with these moves, Lucent's profile in data networking remains as thin as a microchip. "We have to be a much greater factor in data networking," Schacht said in a recent interview in which he alluded to possible acquisition plans, but sidestepped any specifics. "We've got to invest in those areas that are growing faster than it's likely that our core business will grow over time. And first among those is data networking. "We've got to decide soon whether we take Bay and Agile and a series of other string of pearls together, or if we do something more significant in a larger way." When will the company decide on its strategy? "It is front and center," he said, but added, "I wouldn't predict." In the aftermath of 3Com Corp.'s recent agreement to acquire U.S. Robotics Corp. in a $7.3 billion stock swap, other data networking companies laboring in the shadow of the industry's giant -- Cisco Systems Inc. -- may be seeking an adoptive parent. Companies that could possibly attract interest from Lucent or its main North American rival, Northern Telecom Ltd., include 3Com; Ascend Communications Inc.; Bay Networks; Cabletron Systems Inc.; Cascade Communications Corp.; Fore Systems Inc. and Newbridge Networks Corp. But any acquisition would bring risks for both seller and buyer. Lucent was spun off only last fall from AT&T Corp., which spent a decade trying and generally failing at various computer and data networking strategies. Any merger between giant, AT&T-bred Lucent and a younger, more entrepreneurial company might create a clash of corporate cultures that could prompt an exodus of crucial research and development talent. And in the short run, at least, any data networking takeover would probably dilute the value of Lucent's stock. Still, because of concerns that annual growth in the data networking market may slow soon from about 90 percent to around 50 percent, shares of most data networking companies are trading near their lowest prices of the last 12 months. Shares of 3Com have fallen from a high of $81.375 last December to close at $33.8125 on Friday. Bay Network's stock has dropped from $38.75 a share last March to $18.875, Cascade shares have fallen from $91.25 in October to $26.125 on Friday. Meanwhile, Lucent's shares have surged, closing at $53.50 on Friday, up from a low of $29.75 just after the company's initial public offering last April. Lucent's fiercest competitor, Northern Telecom, is ahead of Lucent in its data communications offerings and shows no sign of slowing. And, as a recent spinoff, Lucent may have to conduct any acquisition under unfavorable accounting rules. According to the Financial Accounting Standards Board, the nonprofit organization whose rules are used by the Securities and Exchange Commission, a company must have been fully independent for two years before it can treat an acquisition as a more attractive "pooling of interests" rather than as a less desirable "purchase." Lucent only became fully autonomous last September. In a purchase, an acquiring company must take a charge against its future earnings for the difference between the price it paid for the target company and the "fair value" of the target's assets. Those charges are usually avoided under a pooling of interests. Some financial analysts said that the accounting issue alone could cool Lucent's ardor for a large takeover. But Schacht seemed to disagree. "It's a complication," he said. "It's not a hurdle." Gregory S. Geiling, a telecommunications equipment analyst at J.P. Morgan Securities, said that the advantages of Lucent's buying a well-known data networking company could outweigh the short-term costs. "It's a natural extension to go from the core of the public network to the wide-area network to the local-area network," he said. But Paul Johnson, a data networking analyst at Robertson, Stephens & Co., who agreed that the potential synergies could be impressive, is one who doubts whether Lucent will actually carry out a deal. "If they could own Cascade, it would be fabulous," he said. "But I just don't think the big companies have the mentalities to do it," he said. "They have been so focused on earnings for so long. To take the hit to get these new technologies, I don't think they have the confidence to pull it off. They don't have the chutzpah."