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Lucent Technologies Inc.

Lucent Technologies Inc.

600 Mountain Avenue
Murray Hill, New Jersey 07974-0636
U.S.A.
Telephone: (908) 582-3000
Toll Free: (888) 4-LUCENT; (888) 458-2368
Fax: (908) 582-2110
Web site: http://www.lucent.com

Public Company
Incorporated:
1995
Employees: 153,000
Sales: $38.3 billion (1999)
Stock Exchanges: New York
Ticker Symbol: LU
NAIC: 334413 Semiconductors and Related Device Manufacturing; 334417 Electronic Connector Manufacturing; 541512 Computer Systems Design Services

Lucent Technologies Inc. is the corporate descendant of AT&Ts Western Electric manufacturing division, which AT&T bought in 1881. For most of the 20th century it was Western Electric that made telephones in nothing but black. Over the years it manufactured other products, including network boxes for telecommunications carriers, PBXs (private branch exchanges) for offices, and semiconductors. Bell Laboratories is also under the Lucent umbrella. Headquartered in Murray Hill, New Jersey, and formed in 1925, Bell Laboratories has a long history of innovations, from synchronizing sound and film in the 1920s to inventing the transistor in the 1940s and the laser in the 1950s. In 1999 Lucent introduced 128 products that originated in Bell Labs, and researchers there claimed more than 1,000 patents during the yeartheir highest number of patents ever. Lucent has complemented its Bell Labs innovations by acquiring numerous high-tech companies. From 1997 to 1999 Lucent spent more than $32 billion on some 30 acquisitions.

In 1999 the company realigned its businesses into four main groups, plus Bell Labs, which supports the other Lucent units by providing basic research and product and service development. Service Provider Networks included optical networking, switching and access solutions, wireless networks, and communications software, plus business focused on serving cable TV operators and other service providers. Enterprise Networks was responsible for voice and data solutions for business and government enterprises and included Business Communications Systems and Government Solutions. NetCare Professional Services offered services for the life cycle of a network, including planning, design, implementation, operations, maintenance, education, and software. Microelectronics and Communications Technologies consisted of the companys microelectronic business, network products, new ventures, and intellectual property. Its products include integrated circuits, optoelectronic components, power systems, optical fiber, cable, and connectivity solutions.

Beginning with $20 Billion in Annual Sales: 1995-96

At the beginning of October 1995 AT&T Chairman Richard Allen announced that AT&T would break into three separate companies. AT&T would continue as a telecommunications company offering long-distance service and wireless communications. The second company would be Global Information Solutions, which would make automated teller machines, bar-code scanners, and other computerized systems. The third would be Lucent Technologies, a company focused on network equipment, switching devices, and business communications hardware.

Lucent was incorporated in Delaware in November 1995. In February 1996 AT&T began the process of making Lucent a stand-alone company by transferring assets and liabilities related to its business. Lucent was formed from the systems and technology units that were formerly part of AT&T Corp., including the Bell Laboratories. Its core was AT&Ts Network Systems Group, which manufactured complex telephone switches, semiconductors, and consumer telephone equipment. Lucent also included the former AT&T Microelectronics. Lucent would begin business with more than $20 billion in annual revenues and a workforce of 137,000 employees.

In April 1996 Lucent completed the initial public offering (IPO) of its stock. The IPO raised more than $3 billion, making it the largest IPO at the time in U.S. corporate history. On September 30, 1996, Lucent became independent of AT&T when AT&T distributed to its shareowners all of its Lucent shares. Once Lucent was separated from AT&T, it began to win large equipment contracts from telecommunications carriers who were AT&Ts rivals. In October 1996 Lucent sold its interconnect products and Custom Manufacturing Services (CMS) businesses.

Lucent formed its New Ventures Group in 1996 to nurture small companies, make venture capital investments, and spin out entrepreneurial firms that could later go public. The New Ventures Group was instrumental in determining which Bell Labs inventions became marketable products. Between 1996 and the end of 1999 Lucent New Ventures created 11 companies and created syndicates of investors to spread the risk involved. At the beginning of 2000 Lucent said it planned to launch at least five new companies each year.

Series of Acquisitions and Mergers Beginning in 1997

Richard McGinn succeeded Lucents CEO Henry Schacht in October 1997 following Schachts retirement. McGinn had joined the old AT&Ts Illinois Bell as a salesman in 1969. By 1993 he was in charge of AT&Ts Network Systems Group. When Lucent was separated from AT&T in 1996, the AT&T board selected Schacht, former head of Cummins Engine and a favorite of Wall Street, over McGinn. Until Schachts retirement, McGinn served as number two under Schacht.

Under McGinn, Lucent began a series of acquisitions and mergers that continued through 2000. Through early 2000 Lucent spent $32 billion in stock and cash to acquire or merge with 30 companies. McGinn also sold off some of Lucents businesses and refocused the semiconductor unit on digital signal processors instead of commodity chips.

Lucents first acquisition since becoming an independent company took place in September 1997, when the company acquired Octel Communications Corporation, a provider of voice, fax, and electronic messaging technologies, for $1.8 billion in stock. In December 1997 Lucent acquired Livingston, a global provider of equipment used by Internet service providers (ISP) to connect their subscribers to the Internet, for $650 million.

In October 1997 Lucent contributed its Consumer Products business to a new venture formed by Lucent and Philips Electronics N. V. in exchange for a 40 percent interest in the venture, which was called Philips Consumer Communications. The venture was formed to create a worldwide provider of personal communications products. A year later Lucent and Philips announced their intention to end the venture, which was terminated in late 1998. In December 1998 Lucent sold certain assets of its wireless handset business to Motorola. Since then, Lucent has continued to look for opportunities to exit the consumer products business.

During 1998 Lucent acquired the following companies: Prominet, a participant in the emerging Gigabit Ethernet networking industry, for $200 million in stock; Optimay GmbH, a German-based software developer for chip sets to be used for Global Systems for Mobile Communications cellular phones, for $65 million; Yurie, a provider of asynchronous transfer mode (ATM) access technology and equipment for data, voice, and video networking, for $1 billion; SDX, a U.K.-based provider of business communication systems, for $200 million; MassMedia, a developer of next-generation network interoperability software that manages connections across data, voice, and video networks; LANNET, an Israel-based supplier of Ethernet and ATM switching solutions, for $117 million; JNA, an Australian telecommunications equipment manufacturer, reseller, and system integrator; Quadritek, a start-up developer of next-generation Internet protocol (IP) network administration software solutions, for $50 million; and Pario Software, a maker of network security software. By acquiring a large number of data-network equipment and software companies, Lucent was positioning itself to compete with companies such as Cisco Systems in building multiservice networks that could support voice, video, and data traffic.

Lucent continued to acquire similar companies in 1999: WaveAccess, an Israel-based developer of high-speed systems for wireless data communications, for $54 million; Kenan Systems Corp., a software developer for third-party billing and customer care, for $1.48 billion in stock; Sybarus, a semiconductor design company; the Ethernet LAN component business of Enable Semiconductor for $50 million; and Ascend Communications, a developer, manufacturer, and seller of wide area network (WAN) solutions, for more than $20 billion in stock. With the acquisition of Ascend Communications in 1999, Lucent became the leader in both voice and data for service providers. An estimated 70 percent of the worlds Internet traffic traveled over Ascend equipment in 1999.

Additional acquisitions in 1999 included: Nexabit, a developer of high-speed switching equipment and software that directs traffic along telecommunications networks, for $900 million; Mosaix Inc., a provider of software that links a companys front and back office operations to help them deliver more efficient customer service, for $145 million in stock; 61 percent interest in SpecTran Corporation, a designer and manufacturer of specialty optical fiber and fiber-optic products; International Network Services (INS), a global provider of network consulting and software solutions, for $3.7 billion in stock; Excel Switching Corp., a provider of open switching solutions for telecom carriers, for $1.7 billion in stock; and Xedia Corporation, a developer of high-performance Internet access routers for wide area networks (WAN), for $246 million.

Company Perspectives:

Lucents strategy is to meet its customers needs by offering an end-to-end solutions platform. This strategy brings together the core products of switching, transmission, software, messaging and optoelectronics (including microelectronic componentry) with the new portfolio offerings obtained through strategic acquisitions as well as the research and development of Bell Laboratories.

Continued Profitability: 1996-2000

From 1995 to 1999 Lucents revenues rose from $21.7 billion to $38.3 billion. After reporting a net loss in 1996 of $230,000, Lucent improved its profitability over the next three years with net incomes of $150,000 (1997), $340,000 (1998), and $1.52 million (1999).

For fiscal 1999 revenues improved across all segments for Lucent. For Service Provider Networks revenues rose 23.3 percent, or $4.45 billion, to $23.56 billion; revenues from Enterprise Networks rose 7.6 percent, or $605 million, to $8.56 billion; revenues from Microelectronics and Communications Technologies rose 17.2 percent, or $796 million, to $5.42 billion.

Since its initial public offering in 1996, Lucent stock increased 11 times its original value, or 1,100 percent, by the end of 1999. It had surpassed AT&T to become the United States most widely held stock, with 4.6 million shareholders. When the companys first quarter results for fiscal 2000 fell short of analysts expectations, however, its stock lost 28 percent of its value in one day, January 5, 2000, reducing the companys market capitalization by approximately $65 billion.

In the following months the stock regained much of its value. The company reported, however, that it was aware of at least 12 class-action lawsuits filed on behalf of persons who purchased Lucents common stock between late October 1999 and January 6, 2000, claiming that Lucent and certain of its officers misrepresented Lucents financial condition and failed to disclose material facts that would have an adverse effect on Lucents future earnings and prospects for growth.

Lucent attributed its shortfall for the first quarter of 2000 to its inability to meet demand for new optical networking products and delays in customers deploying their new network equipment. Analysts noted that Lucent had misread the shift in demand to fiber optics, which provided more bandwidth, and then reacted too slowly to stop its customers from defecting to chief competitor Nortel Networks.

Analysts were mixed in their outlook for Lucent. Neil Weinberg of Forbes wrote, Lucent is well poised to help lead an optical revolution that will whip information around the globe at a fraction of todays cost. He noted that big mergers such as America Online and Time Warner would only increase the demand for Lucents products and services. Although the companys reputation had been sullied by its first quarter results, analysts foresaw a surge in spending on telecommunications equipment over the next four years. Meanwhile, Lucent was investing heavily to increase its fiber-optic production capacity.

As part of Lucents strategy to focus on high-growth markets, the company announced at the end of February 2000 that it would spin off its private branch exchange (PBX), cabling, and LAN (local area network) business segments later in 2000 into a new company that would be headed by Lucent CFO Donald Peterson. Those segments represented Lucents slower-growing corporate networking businesses. Although those business segments were profitable and exceeded growth rates in their markets, they did not fit Lucents aggressive growth profile. The new company would include most of Lucents enterprise equipment, and Lucents channel partners supported the concept of being able to deal with a smaller business entity.

Continued Acquisitions in 2000

In the first quarter of 2000 Lucent acquired Agere Inc., an Austin, Texas-based maker of programmable network processors, for about $415 million. It also acquired Ortel Corporation, the second largest producer of lasers used for video in cable TV networks, for about $2.95 billion in stock. Lucent planned to use Ortel to supply interactive television equipment to large cable operators, such as AT&T, to enable them to transform one-way broadcasting systems into interactive two-way communications networks.

Although Lucent was best known for its networking products, the company also was involved with other emerging technologies. In the field of digital music Lucent developed the ePAC (enhanced perceptual audio coder) to deliver high-quality sound in a safe and secure environment. Lucent was one of the founding members of the Secure Digital Music Initiative, an industry group of more than 140 companies and organizations that worked to support the rights of content owners who wished to deliver music securely over the Internet. Lucent licensed its ePAC technology to a wide range of music companies, from record labels to makers of downloadable players.

Internet video was another new field in which Lucent was active. In March 2000 Lucent formed a new company called GeoVideo Networks, which was 40 percent owned by Lucent New Ventures Group, to create the first video network designed for the Internet. The network would allow users to share video between remote locations. Geo Video planned to stream high-definition TV, a much higher-quality video than was presently available over the Internet.

Principal Divisions

Service Provider Networks; Enterprise Networks; NetCare Professional Services; Microelectronics and Communications Technologies; Bell Laboratories.

Key Dates:

1995:
Company is incorporated in November.
1996:
Structural transformation is completed when Lucent Technologies is formed from the systems and technology units, including Bell Laboratories, that were formerly part of AT&T; IPO occurs in April.
1997:
After reporting a loss in 1996, Lucent becomes profitable with net income of $150,000.
1999:
Amidst numerous acquisitions, the merger with Ascend Communications ranks as the companys largest to date and catapults Lucent into the leadership position for providing voice and data to Internet service providers.

Principal Competitors

Alcatel USA Inc.; Bay Networks Inc.; Cisco Systems Inc.; Fujitsu America Inc.; JDS Uniphase Corporation; Nortel Networks Corporation; Siemens Corporation; Sycamore Networks Inc.

Further Reading

Auerbach, Jon, AT&T Spins Off Lucent Technologies Inc. to Investor Enthusiasm, Knight-Ridder/Tribune Business News, April 5, 1996.

Big Deals, Electronic News (1991), August 16, 1999, p. 4.

Caisse, Kimberley, Cisco, Lucent Each Make Acquisition, Computer Reseller News, August 31, 1998, p. 76.

Church, George J., Just Three Easy Pieces, Time, October 2, 1995, p. 38.

Cook, William J., Dialing for Dollars, U.S. News & World Report, October 2, 1995, p. 59.

Cope, James, Lucent to Spin Off Corporate Networking, Computer-world, March 6, 2000, p. 12.

DAmico, Mary Lisbeth, Lucent Can Consolidate GSM Technology via Optimay Deal, InfoWorld, April 27, 1998, p. 62.

Gibbs, Lisa, Dont Hang Up on Lucent, Money, March 1, 2000, p. 52.

Green, Stephanie, Breaking Up May Be Easy to Do for Lucent, Computer Reseller News, March 6, 2000, p. 2.

Haber, Carol, Lucent Arrivesin Style, Electronic News (1991), April 8, 1996, p. 1.

Hersch, Warren S., Network Pairings May Spark Trend, Computer Reseller News, August 16, 1999, p. 114.

Kenan Systems: The Quieter Buy for Lucent, Americas Networks, February 15, 1999, p. 10.

Korzeniowsi, Paul, Unleashing Lucent, Americas Networks, May 1, 1996, p. 34.

Lawson, Stephen, Lucent Buys Multiservice Vendor, InfoWorld, August 3, 1998, p. 44.

Lucent-Ascend Merger OKd, Electronic News (1991), April 19, 1999, p. 37.

Lucent Buys Chipmaker, Computer Reseller News, January 24, 2000, p. 2.

Lucent Buys Livingston, Computerworld, October 20, 1997, p. 32.

Lucent Buys Pario Software, PC Week, December 7, 1998,p. 152.

Lucent Does It Again, Israel Business Today, November 30, 1998, p. 23.

Lucent Does It for Lannet, Israel Business Today, July 15, 1998.

Lucent Enters New Wireless Data Space, Telephony, December 7, 1998.

Lucent to Buy Enables Ethernet Biz, Electronic News (1991), March 8, 1999, p. 4.

Lucent to Buy IP Company, Computer Reseller News, October 12, 1998, p. 2.

Murphy, Chris, Capacity Problems Hurt Lucents Revenue, Earnings, InformationWeek, January 24, 2000, p. 123.

Niccolai, James, Ascend Falls into Place, InfoWorld, July 19, 1999, p. 46.

Ohlson, Kathleen, Lucent Bids for Access to Europe, InfoWorld, June 15, 1998, p. 68.

Perone, Joseph R., Lucent Buys Laser Producer for Interactive Television Technology, Knight-Ridder/Tribune Business News, February 7, 2000.

, Lucent Unit Spins Off Big Inventions into Profitable Small Businesses, Knight-Ridder/Tribune Business News, January 12, 2000.

, New Jersey-Based Lucent Completes Octel Acquisition, Knight-Ridder/Tribune Business News, September 30, 1997.

, New Jersey-Based Lucent Technologies Takes $60 Billion Beating, Knight-Ridder/Tribune Business News, January 6, 2000.

Presti, Ken, Lucent to Acquire Start-Up Prominet, Computer Reseller News, December 15, 1997, p. 14.

Robinson, Sara, Nortel Acquisition Fortifies Lead in Optical-Networking Field, Knight-Ridder/Tribune Business News, March 21, 2000.

Schaff, William, Lucents Networking Splash, InformationWeek, May 4, 1998, p. 206.

Semilof, Margie, Lucent Buys Nexabit in $900M Deal, Computer Reseller News, July 19, 1999, p. 64.

, Lucent Buys Switch Maker for $1.7B, Computer Reseller News, August 23, 1999, p. 30.

Thyfault, Mary E., Lucent to Buy Maker of CRM Software, InformationWeek, April 12, 1999, p. 191.

Traiman, Steve, A Century of Audio Innovation, Billboard, January 29, 2000, p. LI.

Weinberg, Neil, Wired and Restless, Forbes, February 7, 2000, p. 90.

David P. Bianco

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Lucent Technologies

Lucent Technologies

600 Mountain Avenue
Murray Hill, NJ 07974
(908) 582-8500
www.lucent.com

Talking with a friend over long distances, whether by telephone, cellular phone, or computer, has never been easier thanks to the innovations developed by ancestors of Lucent Technologies. Lucent has roots reaching back to 1876, when inventors raced to build the first telephone. It started as American Bell, combined forces with Western Electric, and then finally became American Telephone & Telegraph (AT&T). In 1996, AT&T split into three separate companies: AT&T, NCR, and Lucent. Today, Lucent remains one of the leading providers of telecommunications equipment throughout the world. And, with the help of its research and development arm, Bell Labs, it continues to develop equipment that transports voice and data in record speed.

An Historic Beginning

Alexander Graham Bell had been working on the plans for an electric telephone for several years when he submitted his designs to the United States Patent Office in January 1876. On the very same day, just a few hours later, another inventor, Elisha Gray (1835-1901), also submitted a patent application for an electric telephone. Gray was cofounder of the Western Electric Manufacturing Company, known for producing electrical equipment, typewriters, and telegraph equipment. Although Gray had been awarded seventy patents throughout his lifetime, he lost the race to become the inventor of the telephone. Alexander Graham Bell was issued the first telephone patent, No. 174,465, on March 7, 1876.

After many experiments, Bell and his laboratory assistant, Thomas A. Watson (1854-1934), sent the first message using a telephone. On March 10, 1876, while Bell was in one room and Watson in another in their shop on Court Street in Boston, Massachusetts, Bell accidentally spilled a chemical and spoke the famous words, "Watson, please come here. I want you." This was the first time a complete understandable sentence was transmitted by electrical impulses through a wire.

Over the following two decades, the company responsible for developing and manufacturing telephone equipment went through several changes. In 1877, Bell, along with Watson and two other partners, formed the Bell Telephone Company. They purchased a controlling interest in Elisha Gray's Western Electric Company in 1881. In 1899, Bell changed his company's name to American Telephone & Telegraph (AT&T). In 1907, Theodore N. Vail, a former employee of the Western Union Telegraph Company, became president of AT&T and combined the Western Electric and AT&T engineering departments to form what would later be known as Bell Telephone Laboratories.

Lucent at a Glance

  • Employees: 77,000
  • CEO: Patricia F. Russo
  • Subsidiaries: Bell Laboratories; Agere Systems, AC; Communication Systems Corporation
  • Major Competitors: 3Com; Alcatel; Cisco Systems; Motorola; Nokia; Nortel Networks; Tellabs; Toshiba

The Birth of Lucent

For most of the twentieth century, AT&T went through a series of name changes, company purchases, and breakups that would eventually lead to Lucent Technologies. Until the 1980s, AT&T had been a monopoly, which means it had exclusive control of manufacturing phone equipment and long-distance telephone lines in the United States. After it refused to lease lines to long-distance companies like MCI, the United States Justice Department forced AT&T to break up into seven regional phone companies, known as "Baby Bells," in 1984.

Timeline

1876:
Alexander Graham Bell receives the first telephone patent.
1877:
Bell Telephone Company is formed.
1881:
Bell purchases a controlling interest in Western Electric Company.
1899:
Bell changes company name to American Telephone & Telegraph (AT&T).
1907:
Thomas N. Vail becomes president of AT&T and Bell Labs is formed.
1922:
Alexander Graham Bell dies.
1937:
Bell Lab scientist receives first of eleven Bell Labs Nobel Prizes.
1947:
Bell Labs invents the transistor.
1958:
Bell Labs invents the laser.
1960s:
Bell Labs invents UNIX.
1984:
AT&T divides into seven regional phone companies called "Baby Bells."
1996:
AT&T splits into three companies and Lucent is born. Henry Schact is CEO.
1997:
Richard McGinn is hired as Lucent's CEO.
1999:
Lucent's initial public offering earns a record $3 billion.
2000:
Lucent experiences a drop in stock price and revenue; company lays off thousands of employees.
2002:
Patricia F. Russo becomes president and CEO of Lucent.

Ten years later, the United States government deregulated, or removed restrictions from, the telecommunications industry. This means that AT&T finally had some competition. The company wanted to stay ahead of this new competition, so in 1996, they divided their corporation into three separate companies: NCR Corporation made large computers; a new AT&T provided long-distance, wireless, and credit card services; and Lucent Technologies made telephones, network switching equipment, and computer chips. Lucent also acquired most of Bell Laboratories.

Innovations That Touch the Lives of Millions

Since 1925, scientists at Bell Labs have been credited with more than forty thousand inventions. In addition to telephone technology, Bell Labs provided Hollywood with the practical means to add sound to silent movies, and made communications and command equipment for the United States military during World War II (1939-45).

In 1947, three Bell Labs scientists received the Nobel Prize for their invention of the revolutionary transistor, an electronic device used to control the flow of electricity. Bell Labs devised the transistor to replace manual telephone exchange switches with automatic electronic switches. Before this, in order to telephone a friend, a person had to call an operator who placed the call for them using flexible cords that plugged into the correct socket, or jack, on a switchboard. So, in effect, the operator controlled the flow. The new technology also amplified long distance signals. Today, transistors exist within nearly all electronic devices such as computers, video cameras, CD players, remote controls, and cell phones.

In 1877, when Bell Telephone was established, there were 3,000 telephones in American homes; in 1900, the number of phones rose to 1.4 million. By the end of the twentieth century, there were phones in more than 100 million households nationwide.

Bell Labs continued to develop many more technological firsts. In 1958, Arthur L. Schawlow (1921-1999), a Bell Labs researcher, and Charles H. Townes (1915-), a consultant to Bell Labs, made history when they invented the laser. Originally known by the acronym LASER, meaning Light Amplification by Stimulated Emission of Radiation, billions of these intense beams of light are at work every day in areas such as manufacturing, construction, and medicine. In telecommunications, lasers transmit voice, data, and video through tiny strands of encased glass called fiber optic waveguides. For example, when an item is purchased at a grocery store it is scanned by a laser. The information from its bar code, including the price, is transmitted to the computerized cash register.

Beginning in the 1960s, transmitting information using computers became increasingly important. In response, Bell Labs scientists developed UNIX, a computer operating system that played a major role in the early days of the Internet. And, more recently, to support the billions of phone calls and the l90 billion e-mail messages sent each year, Bell Labs developed technology to provide efficient and rapid movement of voice and data.

In 2002, with sixteen thousand employees working in sixteen countries around the world, Bell Labs continues to make amazing advancements in telecommunications. For example, they are developing the world's first functional transistor that is only one molecule thick. Early transistors were about the size of a lightbulb, and actually looked like a lightbulb, with glass surrounding a metal filament. If new transistors are one molecule thick, it means that they are much thinner than a piece of paper.

The Rise and Fall of an Empire

When AT&T split into three companies in 1996, Lucent was the biggest corporate spin-off in American history. Lucent completed an initial public offering (IPO) by selling stock in itself for the first time. Sales of this stock raised $3 billion. The company was off and running, and many investors and financial specialists predicted a bright future. Henry Schact, a fifteen-year AT&T board member, was chosen to lead the way as Lucent's first chief executive officer (CEO).

The word lucent dates back to the fifteenth century and means "glowing light." Lander Associates, a San Francisco design firm, came up with the name to describe the company's clarity of thought, purpose, and vision. Lucent's logo, a red, sketched circle, is called "the innovation ring."

For the next three years, Lucent purchased and merged with several other companies to expand their products and services. Some of the larger transactions included their $20 billion acquisition of Ascend Communications, an independent Internet supplier, and a $3.7 billion merger with service specialist International Network Services. In a 1999 New York Times article, Robert Rich of the Yankee Group, a technology research company in Boston, said "If you are looking for one-stop shopping, Lucent will have more arrows in its quiver than anyone else." The company enjoyed steady growth until 1999 when the number of employees reached 153,000, and Lucent stockholders benefited from stock prices at $77 a share, an enormous increase from $7 a share at its IPO.

Lucent Techno Speak: What Does It All Mean?

  • Communications networking equipment: A communications network is a system of computers, terminals, and other devices that are interconnected. Lucent makes the hardware and software that lets the parts of the system speak to each other, or exchange data. For example, counselors in a school use networked computers to share information about student schedules.
  • Internet service provider (ISP): An ISP is a company that consumers and businesses go to for their Internet service. Lucent develops the infrastructure, or the electronic system, that helps ISPs provide Internet service. Examples of ISPs are American Online, Microsoft Network (MSN), and Comcast.
  • Optical network: Lucent develops optical networks, which carry digitized voice or data at very high speed on multiple channels of light. Optical networks are used in Internet, video, and multimedia technology. For instance, cable television is now distributed to homes through optical networks. One result is that you can get hundreds of TV channels to surf through.
  • Wireless network: Lucent creates networks that allow wireless devices to talk to each other. Wireless devices include cellular phones and pagers.

Soon, however, good times began to turn bad. "The company got off to a fast start selling equipment like switches that help carriers connect telephone calls to traditional phone companies like its former parent," said Kevin Peraino in a 2000 Newsweek article. The problem was, Perano went on to say, that Lucent did not keep up with the times. It did not focus enough on Internet technology. At the time the article was printed, Lucent's stock had dropped more than 70 percent.

Changing of the Guards

In 1997, Richard McGinn, an AT&T salesman since the 1960s, replaced Schact as CEO and chairman of Lucent. When the company began to take a downturn in 2000, Schact replaced McGinn and returned to serve as Lucent's temporary boss until a permanent replacement was found. Schact said in a 2000 Wall Street Journal article, "We are looking at 2001 as a transition and rebuilding year for Lucent." But its problems only got worse. By January 2002, over sixty thousand Lucent employees had been laid off, and its stock was sold at $6.94. It was time for a new leader.

On January 7, 2002, a 49-year-old resident of Trenton, New Jersey, and twenty-year company employee, Patricia F. Russo, became Lucent's new CEO, while Schact remained as chairman. "We've built a plan that is solid, credible and broad-based. And we're going to restore this company to the luster it once had," Russo told the authors of a Wall Street Journal article on January 8, 2002.

Lucent files an average of four patent applications each workday and has received twenty-eight thousand patents since 1925. Bell Labs researchers have been awarded eleven Nobel Prizes, with the first going to Clinton J. Davisson (1881-1958) in 1937, for his experiments on the wave nature of electrons.

Skeptics questioned Lucent's ability to bounce back unless the company's and Russo's goals stayed focused on what it does best: producing equipment for large telecommunications companies like AT&T and Verizon. David Toung, a telecommunications equipment analyst, said in a January 8, 2002, article in a Bergen County, New Jersey, newspaper, The Record, "I think this company will ride the telecom market and when the telecom market comes back, they will come back."

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Lucent Technologies

LUCENT TECHNOLOGIES

Lucent Technologies Inc.'s core businesses involved the design, development, and manufacture of communications systems, software, and products. The company supplied public and private communication systems and software to most of the world's largest communications network operators and service providers.

Since the time it was formed in 1995 as part of AT&T's restructuring, Lucent was also involved in other communications-related businesses, ranging from consumer products to microelectronics. It left the consumer products market in 1999 and 2000 by selling off its wireless handset unit and other consumer products businesses. To better focus on its core businesses and raise much-needed cash, Lucent sold or spun off significant portions of its operations in 2000 and 2001. In September 2000 Lucent spun off its enterprise networks business, which included voice and data solutions for business and government enterprises, into a separate and independent company, Avaya Inc. At the end of March 2001 Lucent spun off its microelectronics business, which included the manufacture of integrated circuits (ICs) and optoelectronics components, into a separate public company known as Agere Systems Inc. For much of 2001 Lucent was in merger talks with French telecommunications provider Alcatel. After the talks collapsed, Lucent sold its optical fiber and cable unit to Furukawa Electric of Japan.

While Lucent enjoyed strong revenue growth from 1995 to 1999, many of Lucent's businesses were affected by a global downturn in the telecommunications industry in 2000 and 2001. The company was also burdened with debt as the result of numerous acquisitions. In the 12 months preceding September 2001, Lucent's stock fell from around $40 a share to around $6, losing some 85 percent of its market value. The company reported quarterly losses of more than $3 billion for two successive quarters in fiscal 2001. As a result of layoffs and divestitures, Lucent's work-force was reduced by 44 percent from 155,000 employees in mid-2000 to 87,000 in mid-2001.

LUCENT SPUN OFF FROM AT&T

Lucent was incorporated in November 1995 in the wake of AT&T's restructuring. AT&T sold 17.6 percent of Lucent to the public on April 10, 1996. The $3 billion initial public offering was the largest U.S. history. The remaining 82.4 percent of Lucent was distributed to AT&T shareholders later in 1996. Lucent is the corporate descendant of AT&T's Western Electric manufacturing division that AT&T bought in 1881. Bell Laboratories was also made part of Lucent. Bell Laboratories is known as the inventor of the transistor, the communications satellite, the laser, the cellular phone, and electronic telephone switching. From the time it was founded until the time it was incorporated into Lucent, Bell Laboratories averaged one patent a day.

In its first nine months as a public company, Lucent reported revenue of $15.9 billion. From 1997 to 1999 Lucent spent $32 billion on some 30 acquisitions. Its largest acquisition during this period was Ascend Communications in 1999 for more than $21 billion. Ascend was the leading manufacturer of ATM switches that were used by telephone carriers to link old voice circuits with new data lines. In 1999 Lucent also spent $1.5 billion to acquire Excel Switching Corp., which made telecommunications network switching products, and $1.5 billion on Kenan Systems Corp., which made customer service software.

In 1999 the company realigned its businesses into four main operating groups in addition to Bell Labs. Service Provider Networks consisted of optical networking, switching and access solutions, wireless networks, and communications software, plus businesses focused on serving cable TV operators and other service providers. Enterprise Networks was responsible for voice and data solutions for business and government enterprises. NetworkCare Professional Services offered a complete range of network services, including planning, design, implementation, operations, maintenance, education, and software. Lucent's Microelectronics and Communications Technologies group included the company's microelectronics business, network products, new ventures, and intellectual property. Its products included integrated circuits, optoelectronic components, power systems, optical fiber, cable, and connectivity solutions.

For much of its history Lucent's stock was popular with investors. From the time of its IPO in 1996 to the end of 1999, its stock increased in value 11 times, or 1,100 percent. With 4.6 million shareholders, Lucent became America's most widely held stock, surpassing AT&T in that regard. Like other technology companies, though, Lucent was affected by the stock market's volatility. When the company's first quarter results for fiscal 2000 fell short of analysts' expectations, its stock lost 28 percent of its value in one day, January 5, 2000.

ACQUISITIONS AND DIVESTITURES MARKED 2000

Lucent continued to pursue acquisitions in 2000 as well as to sell off non-core businesses. It continued to divest its consumer products units, selling its consumer telephone manufacturing business in the United States to Hong Kong-based VTech Holdings for $113 million. Lucent's first major acquisition in 2000 was Ortel Corp. for $2.95 billion. Ortel developed opto-electronic components for cable TV networks and was a market leader for lasers that increased the bandwidth of existing cable networks. The acquisition strengthened Lucent's ability to build high-capacity networks for cable TV operators.

Lucent hoped to strengthen its position in supplying fiber-optic networks with a $4.75 billion acquisition of Chromatis Networks Inc. Chromatis was a two-year-old start-up company that had yet to sell a single product. The company was involved in developing optical networking technology known as DWDM (dense wavelength division multiplexing). The company hoped to link long-haul networks with the so-called "last-mile" of high-speed telecommunications networks. However, the acquisition did not prove fruitful, and Lucent closed down Chromatis Networks in August 2001.

Other significant acquisitions in 2000 included Spring Tide Networks, a vendor of network switches and Internet protocol (IP) products, for $1.3 billion, and Hermann Technology Inc., a supplier of next-generation optical network devices, for $438 million.

Lucent completed the spinoff of its enterprise networks business in 2000. The new company was called Avaya Inc. It began with 34,000 employees in 90 countries and was expected to have revenue of $8 billion annually. Its core business was the manufacture and marketing of traditional telecommunications equipment, which included Lucent's enterprise switching business and call center equipment and software. Lucent remained active in the enterprise market by focusing on corporate demand for hosted Web and e-commerce applications. Its NetworkCare Professional Services division would also continue to provide network planning and integration services.

Although Lucent was the leading vendor of power supplies in the United States and internationally, the company decided to put its power systems business up for sale in 2000. Lucent Power Systems generated revenue of $1 billion in the United States and $1.2 billion internationally. Late in 2000 it was sold to Tyco International Ltd. for $2.5 billion.

LOSSES MOUNTED DURING 2001

In March 2001 Lucent announced it was seeking buyers for its fiber and cable business unit, one of its core businesses. At the time Lucent was the second largest producer of optical fiber in the world behind Corning. The unit's revenue grew to nearly $2 billion in 2000. French telecommunications giant Alcatel SA made a bid for the fiber-optic business, then entered into talks with Lucent about a possible merger. At the end of May 2001 The Washington Post reported that Alcatel and Lucent were finalizing an agreement to merge, with Alcatel acquiring Lucent for $32 billion in stock. The next day it was announced that talks had collapsed, reportedly over issues of control. Lucent announced it would proceed with its own turnaround plan, which included laying off 10,000 workers and reducing annual expenses by $2 billion. Lucent subsequently sold its fiber-optic business to Furukawa Electric Co. of Japan for $2.5 billion, with Corning paying an additional $225 million for Lucent's interest in two joint ventures in China.

LUCENT'S GOAL: RETURN TO PROFITABILITY

The years 2000 and 2001 were difficult for Lucent. The company sold or spun off several revenue-producing units. At first it appeared that Lucent wanted to sell its non-core business assets and strengthen its core businesses. Later it became apparent that the cash-hungry company was burdened with a significant amount of debt, which caused it to sell more revenue-producing businesses, such as its fiber optic solutions unit, in 2001.

Lucent also faced a slowdown in the telecommunications market, which caused some of its customers to go out of business. The combination of a debt-laden balance sheet and a slowdown in spending by its customers made the company desperate for cash. For the quarter ending December 31, 2000the first quarter of Lucent's 2001 fiscal yearLucent lost $1 billion and experienced a 26 percent decrease in revenue from the same quarter of the previous year. Revenue from continuing operations declined 18 percent in the second quarter compared to the previous year, and Lucent's loss rose to $3.7 billion. In the third quarter Lucent posted a $3.25 billion loss as it accelerated its cost-cutting program by offering buyouts to some 10,000 employees. Other cost reduction measures included closing manufacturing plants and reducing the number of products. Lucent also planned to trim an additional 15,000 to 20,000 jobs by the end of 2001. Its goal was to return to profitability in fiscal 2002.

FURTHER READING:

"Acquiring Company of the Year." Mergers & Acquisitions, January 2000.

"Back to the Drawing Board: Schacht Speeds up Lucent's Turnaround Effort." Telephony, June 11, 2001.

Bucholtz, Chris. "Avaya Takes Flight." VARbusiness, January 8, 2001.

Drozdiak, William, and Greg Schneider. "Lucent Merger Talks Collapse." The Washington Post, May 30, 2001.

Feduschak, Natalia A. "Lucent Buys Ortel for $2.95B." Multichannel News, February 14, 2000.

Garretson, Rob, and John Schwartz. "For $4.75 Billion, Lucent Gets Tiny Va. Firm and a Big Idea." The Washington Post, June 1, 2000.

"Loose Ends." Orlando Business Journal, July 27, 2001.

"Lucent: Suddenly, the Hole Is Even Deeper." Business Week, June 11, 2001.

Miller, Elizabeth Starr. "Download: Whale Watching." Telephony, February 26, 2001.

Schaff, William. "Reeling Lucent Pushes Spin-Off Despite Chilly IPO Market." InformationWeek, March 26, 2001.

SEE ALSO: Fiber Optics; Optical Switching; Photonics

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