Lucent Prepares to Clear the Decks

On Thursday, Lucent (LU) will explain how it's going to right a badly listing ship: By gathering up everything that isn't nailed down and flinging it overboard.

Now that Lucent has found some scratch in the convertible market and its creditors have relaxed their covenants, it is free to use its planned $9 billion writedown to clear a path to profitability. The charge will cover the costs of leaving unprofitable countries, bidding adieu to unprofitable customers and lopping off profitless products. In people terms, about 20,000 more workers will lose their jobs, on top of the 20,000 who have already departed this year.

Of course, it will take an army of lawyers to finesse Lucent out of various long-term service agreements, but that's just one page in a thoroughly ugly story. The bigger question, say Lucent watchers, is whether the phone equipment maker can make a deathbed conversion to profitability after a short, growth-obsessed life, which was doomed by improper accounting, indiscriminate loans to troubled customers and ham-handed product development.

By any measure, Lucent has little choice but to streamline operations. Yet in several instances, that means saying farewell to the people and technology that under better management could have brought Lucent more quickly out of its tailspin, industry observers say. Lucent shares were up 15 cents at midday Wednesday to $6.66.

Baby, Bath Water

Case in point: The tale of Chromatis.

Little more than 14 months ago, Lucent shelled out $4.5 billion for the metro-optical gear shop, whose products were to join Lucent's old-line synchronous optical networking, or Sonet, gear with the vanguard of cheaper, smaller, more efficient optical boxes. Metro gear is equipment that enables the Internet within city areas.

But after a daunting integration process with two existing Lucent optical products, most of the Chromatis sales and support team split. On top of that, Lucent's entire optical division was in flux: Three successive optical chiefs left the company abruptly over the past year. Today, industry analysts say the Chromatis product is nowhere to be found and recent news reports say its research and development arm in Israel is on its last legs.

So with Lucent looking to shrink overseas operations and cull unprofitable products, it might not be much of a stretch to say the highly regarded Chromatis operation is at risk. And as costs go, after taking a $428 million charge for in-process research and development on Chromatis, Lucent still carries close to $4 billion of its value on its books.

Lucent is mum on Chromatis ahead of its restructuring announcement, which is planned for noon EDT Thursday.

"We are looking at all parts of our business as part of our restructuring," says a Lucent spokesman. "We have nothing to announce regarding specific products or services at this time."

Talk About Faint Praise

Industry observers say the Chromatis saga fits a well-rehearsed script for Lucent: Buy a leading technology -- outfits like Nexabit and Ascend jump to mind -- then suffocate the opportunity under a clueless and unwieldy organizational structure.

"Looking back on it, Lucent has mismanaged about as well as any company in the U.S.," says Sam Greenholtz, a former senior network engineer at Verizon and now an analyst with Communications Industry Researchers in Charlottesville, Va.

For its part, Lucent says it's currently cutting in accordance with its customers' needs and market conditions.

But the market may not be entirely to blame for Lucent's woes.

When Greenholtz was with Verizon, the nation's largest phone company, he recalls that Lucent initially came in with a Chromatis product that was a generation ahead of what Verizon needed. In subsequent return visits, he noticed that, instead of marrying some of the Chromatis features with their existing tech, Lucent had dropped the Chromatis offering altogether and was pushing a modified long-haul Sonet product.

"Had they integrated the two, they would have had a tremendous product," says Greenholtz.

Since joining CIR, Greenholtz has interviewed another telecom giant that was also shopping for a Chromatis-type next-generation metro product but found Lucent had none to offer. Shin Umeda, optical analyst with Dell'Oro Group, another industry research shop, has also seen no evidence of Chromatis in the market.

Notably, industry spending, while dwindling on city-to-city network routes, has held up reasonably well within cities, where so-called metro gear is in demand. Lucent, which notoriously missed a critical product cycle in the 10-gigabit optical transport market, ceding vast profits to rival Nortel (NT), now looks to be on the sidelines of yet another sales cycle.

"Look at Verizon, Lucent supplied us with 65% of all our gear," says Greenholtz. "That's Lucent's business to lose, and they are doing a good job of it."

Doug Green, a former Chromatis executive who's now with optical upstart Ocular Networks, says no one can blame Chromatis' tech for its apparent lack of success at Lucent. "If they did [kill] it, it would not be an indictment on Chromatis, though it would certainly surprise me," Green says. "They've got nothing to replace it."

"Chromatis had lots of potential," says Greenholtz. "I don't see how they could continue to move forward [in the metro market] without that next-generation box. Chalk it up to mismanagement."

There seems to have been quite a bit of that at Lucent lately.

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