At least for a day,
is back in Wall Street's good graces.
The onetime Wall Street darling saw its shares rise 16% Wednesday on news it will spin off its sluggish office phone-and-computer-wiring unit. Investors believe the deal will allow Lucent to better position itself as the leading gear provider for new-generation networks, which have generated immense investor enthusiasm in recent months. And with the stock under pressure since January, many investors have been eager to get back into Lucent because it's cheaper than its peers.
Still, though the spinoff will allow Lucent to clear its decks of slower-growing operations and improve its core numbers, analysts suggest Lucent will need to do more to boost competitiveness as it undertakes its first major makeover since it was spun off from
Back on Track
The spinoff should allow Lucent to become a leaner operation with faster-growing businesses, in the mold of industry leader and stock-market juggernaut
. The company says the yet-to-be-named spinoff will have an $8 billion annual business and employ 34,000 people. With more than 160,000 employees in 62 countries, Lucent has traditionally been seen as bulky. In fact, on a revenue-per-employee basis, Lucent has generally been barely half as efficient as leader Cisco.
Analysts say separating the slow-growing office wiring business is a step in the right direction, but much more is needed, especially in the high-growth optical networking arena. Traditional telcos have shifted their buying from conventional switches to higher-capacity optical switches and Lucent is still playing catch-up, while companies like
have been ahead of the curve, analysts say. Beyond that, Lucent must also strengthen its wireless equipment offerings as the wireless telcos go shopping for newer, more capacious network technologies.
Truc Do, one of the first analysts to take a hard look at Lucent, cautions that much of Wednesday's move is driven by Lucent's cheap valuation in an increasingly rich market. Do, who warned about the company's performance as far back as a year ago, even as his peers were still bullish, says the spinoff "doesn't change our opinion of their carrier business, which is still losing share. This is a slight positive, but not a fundamental change." Do has a hold on Lucent and a buy on Nortel. SoundView has no banking ties to these companies.
"My concern is that they still have to migrate out of the voice-centric environment and develop a better strategy to move more toward a data world," says
Gruntal & Co.
analyst Michael Davies. With news of the spinoff, Davis raised his rating on Lucent to buy from neutral; his firm has no banking ties to Lucent.
Lucent shares swooned early this year following an earnings shortfall that stemmed from Lucent's inability to keep abreast of increasing demand for high-capacity core network switches. The episode, which saw Lucent's shares drop by a third in a single day, signaled to Wall Street that the old phone network king wasn't nimble enough to shift development toward new network technologies.
Wall Street had expected Lucent to make some move to whip up the share price and had speculated a retrenchment would involve some form of layoffs or a spinoff. Analysts say Lucent is also still considering a tracking stock for one or two of its faster growing units including optical networking and microelectronics. Lucent CEO Richard McGinn said recently that there is no compelling reason to pursue a tracking stock.
Rivals Nortel, Cisco and
have benefited from Lucent's failings by sweeping up customers that Lucent couldn't satisfy. The share prices this year tell the story: Nortel has risen 10%, Cisco 23% and Ciena an astounding 178%. By contrast, Lucent shares were down 20% on the year at Tuesday's close and are still down some 7% even considering Wednesday's jump.
Eyeing the Optical Business
Lucent officials said specific changes related to the spinoff would include channeling more research money into growth areas including optical and data networking, wireless equipment and semiconductors. In a conference call Wednesday, Lucent execs also said they would boost efforts to sell optical equipment at what's known as the edge of the networks, the high-speed gear for Web-hosting-type services. Internet infrastructure has been an area where Lucent is seen as lagging behind Cisco and
Lucent's Rich McGinn said he was unable to provide specific guidance about results these initiatives would generate.