Lucent Folds Up a Promising Tent in Cutting Off Chromatis

Lucent (LU) shuttered its Chromatis unit on Tuesday, slamming the door on a once-promising foray into next-generation Internet equipment.

The decision comes as Lucent, seeking to stanch a robust flow of red ink, moves to cut costs and exit unprofitable businesses. The company last week detailed a plan to focus on 30 core customers in 20 countries. But as TheStreet.com noted, the shutdown highlights Lucent's inability to integrate leading tech into new products. It also raises the question of whether Lucent's cutbacks will come at the expense of the very technologies that could provide the best growth opportunities.

Lucent paid $4.5 billion in stock for Chromatis last summer, entering what promised to be the lucrative business of selling switches that direct Internet traffic around cities. Chromatis was to combine several high-capacity switching and transport features in one box to compete with products such as Cisco's (CSCO) Cerent box. Now, Lucent will hope to milk sales from its more conventional metro gear in the absence of next-generation products.

Despite a broad decline in the stock market Tuesday, Lucent shares jumped 43 cents, or nearly 6%, to $7.74.

Shifting Priorities

The shutdown will displace about 150 Chromatis employees, most of whom are located at the research lab in Israel and the rest in Herndon, Va. TheMarker.com, an Israel-based financial news outlet that is a partner of TheStreet.com, reported the closing Monday.

Lucent said Tuesday that discontinuing Chromatis was part of a shift in priorities. "We had to make some difficult decisions to maximize the opportunities with our larger service provider customers," said a Lucent representative.

A spokesman said a writedown of Chromatis' value would represent an undisclosed portion of the $7 billion to $9 billion charge the company expects to take. According to Securities and Exchange Commission filings, Lucent has taken nearly $500 million in in-process research and development charges related to Chromatis, leaving nearly $4 billion of unrealized acquisition value still on the books.

Emblematic

Many people both inside and outside the company view the Chromatis failure as emblematic of Lucent's inability to manage its once-hot growth. These people say Chromatis fits a pattern of suffocated tech buys, including those of Nexabit and Ascend.

Still, some Lucent insiders say that despite Chromatis' claims of superior technology, the Chromatis team failed to deliver the product on time and within budget. And Lucent says it is still in the metro optical networking business with two products: EON, a dense-wave division multiplex, or DWDM, transport product that multiplies the traffic capacity on each optical fiber strand, and DMX, a synchronous optical networking, or Sonet, product that is designed as a bridge to the more capacious DWDM tech.

"I can understand this decision from a business standpoint," says Doug Green a former Chromatis executive now with Ocular Networks, an equipment startup. "To Lucent, Chromatis was a satellite operation. Lucent is trying to figure what it does best and focus on that. Its survival depends on it."

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