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Lucent a target?
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December 13, 2000: 6:39 p.m. ET
Lucent continues to trade actively on Nokia takeover speculation
By Staff Writer David Kleinbard
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NEW YORK (CNNfn) - The stock of telecommunications giant Lucent Technologies Inc. continued to trade on above-average volume Wednesday amid rumors that the company could be a takeover target for Finnish equipment giant Nokia Corp. or another industry player with deep pockets.
Murray Hill, N.J.-based Lucent (LU: Research, Estimates) supplies communications hardware and software to most of the world's largest phone companies and is a substantial player in the market for microelectronic components for communications applications.
At the end of last year, speculating about a takeover of Lucent would have been almost absurd. A year ago, the company had a market cap of about $280 billion and was an institutional investors' favorite. However, after a year of earnings misses, product blunders, and a management change at the top, the company's stock is down about 76 percent from its 52-week high, reducing its market value about $62 billion.
While $62 billion is a large sum of money, it's within the range of a dominant, successful telecom equipment company such as Nokia (NOK: Research, Estimates), analysts said. Lucent has a substantial amount of engineering talent, a broad product array, and its business segments probably are worth more than the company's current market cap, analysts said this week.
On Tuesday, Lucent's stock jumped $2, or 12 percent, to $18.68 on trading volume that was almost double its daily average in response to speculation that Nokia might be interested in buying the company. On Wednesday, it added another $1.25 to $19.94, once again on higher-than-average volume. Its shares have risen 38 percent since their close on Dec. 7.
Lucent spokeswoman Michelle Davidson declined to comment on the takeover rumors Wednesday. Nokia, the world's largest and most profitable mobile telephone maker, declined to comment to Reuters Tuesday. "That's nothing we want to comment on," Nokia chief spokesman Lauri Kivinen told Reuters.
Merrill sees a takeover as possible
Merrill Lynch analyst Michael Ching added some credence to the takeover speculation with a research note he issued Wednesday.
"Lucent has run up recently on media discussion of being a take-over target. We believe that in the current environment, this is a possibility," Ching wrote.
Lucent's stock also has traded actively because of the pending spin-off of its microelectronics unit, named Agere Systems.
According to a registration statement filed Tuesday with the Securities and Exchange Commission, Agere is the world leader in sales of communications semiconductors. On a pro forma basis, it had operating income of $279 million on revenue of $4.76 billion in the 12 months ended Sept. 30, 2000. Agere employs about 16,500 people worldwide, and analysts estimate its market cap would be at least $45 billion after an initial public offering. In other words, at least 70 percent of the parent company's current market value is represented by the potential value of a publicly traded Agere.
One reason Lucent has decided to spin off Agere is that Lucent's competitors are reluctant to purchase components from one of Lucent's divisions. Lucent also wants to take advantage of what, until recently, was a very hot market for communications chip stocks.
"Lucent is trading at a discount using our sum of the parts model," Merrill's Ching said. "Considering fiscal 2001 sales, our analysis suggests that the Agere spin-off could be worth $18 per share and core Lucent is worth $9 per share, yielding about 48 percent upside."
"An acquirer could purchase the entire Lucent and recover a substantial portion of the payment through a sale of the microelectronics group," Ching added.
On Oct. 23, Lucent ousted its chairman and chief executive officer, Richard McGinn, and named an interim replacement while it searches for new talent to fill the top slot. The company brought back Henry Schacht, the company's CEO from 1995 to 1997, to be the interim chairman and CEO until the board completes its search. On that same date, the company issued its fourth earnings warning so far this year.
"Lucent management is in a state of flux under the temporary leadership of Henry Schacht, so selling the company could be a quick solution to filling a management void," Ching said.
A foothold in North America
Analysts at other securities firms said that a takeover of Lucent is possible, but not necessarily likely. The company could be a good merger partner for a telecommunications equipment maker looking for a strong foothold in North America, which is where Lucent derives about 70 percent of its revenue, analysts said.
"It's in the realm of reason," Lehman Brothers analyst Steven Levy said. "Lucent could be attractive for a company that doesn't have great exposure in North America. In September, we predicted that two of the telecom equipment makers would merge over the next 12 months, although we didn't say which two."
However, Lucent's management probably wouldn't want to sell the company at its current depressed price, Levy said.
"The management of a tech company that has gone from $80 per share to $15 doesn't even want to think about selling out before they turn it around," the Lehman analyst said. "No one wants to sell at the bottom, and they just hit bottom."
If Lucent is contemplating a sale, there are a limited number of partners that would make a logical fit and would have the currency needed to carry out the transaction, Levy said. Nokia is one of that select group cited by some analysts, as is French telecom equipment maker Alcatel SA (ALA: Research, Estimates).
Sanford Bernstein analyst Paul Sagawa also views a takeover by Nokia as possible, but unlikely.
"My understanding of Nokia's management makes it unlikely that they would want to do this," Sagawa said. "Nokia has been doing well with organic growth and not doing large acquisitions. On the other hand, Lucent has a lot of assets that might be valuable, and some of those assets might match up well with Nokia. Lucent needs strong management, and Nokia definitely has that."
"Within the wireless infrastructure market, Nokia is really a GSM specialist," Sagawa said, referring to the mobile phone standard used in most of Europe. "Lucent is clearly the number one maker of wireless infrastructure equipment in the North American market using the CDMA and TDMA standards. The combination would be the largest wireless infrastructure provider in the world, surpassing Ericsson (ERICY: Research, Estimates)."
The doubters
SG Cowen analyst Christin Armacost, by contrast, says that a takeover of Lucent would be a very bad idea for Nokia or Alcatel.
"I'm confused by the rumors of a potential takeout," Armacost said. "I don't understand the potential synergies with Nokia or Alcatel, and an acquisition would be quite dilutive to their earnings. Plus, there is little visibility and confidence in Lucent's revenue next year, so an acquirer would be making a leap of faith."
While Lucent concentrates on equipment for the CDMA and TDMA wireless standards, the GSM standard is where most of the opportunities will be for the next generations of wireless networks, Armacost said. In addition, Lucent's biggest customer for wireless infrastructure equipment, AT&T, recently decided to give a significant amount of business to Nokia and Nortel on a wireless contract announced Nov. 30
"If these rumors are true, then I would short the hell out of Nokia," Armacost said. "It would throw Nokia's whole business model and earnings in jeopardy." Selling short is a method of profiting from a stock's decline.
Of course, any acquisition of Lucent by a European company would have cultural integration issues, and the company would be a large bite to swallow, even at its current level.
"The Finns are not by nature impulsive," Sagawa said. "Any final price tag for Lucent probably would be around $100 billion. Who out there can do a $100 billion deal these days?" 
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