Lucent (LU) was the talk of the market Monday, as investors lapped up takeover rumors and seized on debatable signs of life in the optical networking sector.

Shares of the hapless telecom equipment maker jumped 24% in heavy trading, bolstered by speculation that aerospace and defense giant

General Dynamics

(GD) - Get Report

has been kicking the tires at Lucent. Conjecture about such a deal has been bouncing around the market for two months, though several industry experts have deemed such a deal far-fetched at best.

Undeterred, Lucent and

Nortel

(NT)

bulls mulled over the prospect of a buyout as well as reports of strong business at optical-gearmaking rival

Ciena

(CIEN) - Get Report

this quarter. Sources familiar with Ciena say the company is busy filling a $20 million order it received from

Telmex

(TMX)

in July.

Lucent and General Dynamics declined to comment.

The Lucent link-up rumor may trace its origins back to early autumn, long before the company's stock had more than tripled off its 52-week low. Back in September, a large aerospace outfit was said to have had very casual discussions with at least one of Lucent's largest customers about whether a change of Lucent ownership would disrupt the critical buyer/supplier relationship. Though the identity of the defense contractor wasn't known, some industry analysts have deduced that General Dynamics would be the most likely company to pursue such talks, however informal.

The thinking is that with an eye toward the future, when defense spending reverts to less-anxious and war-aware levels, the defense giant would do well to get itself a more diversified business. Though Lucent's annual revenue has fallen more than 75% from its 2000 peak, the company still has about $8 billion in yearly sales. And though that number could continue to fall, it isn't likely to decline forever, because Lucent and Nortel gear makes up most of the country's phone infrastructure. That means that telcos, unlikely to unplug their networks right away, probably will continue to buy upgrades from their old-line suppliers.

Lucid?
Lucent's sudden surge

Any buying in telecom gets an inordinate amount of attention these days, because there is so little of it. That's why Ciena's humming production sounds like music to optimistic investors' ears.

Though the company announced the Telmex deal in July, manufacturing and shipments have largely become a fourth-quarter event. Ciena said in August that it expected about $50 million in sales for the fourth quarter. That is roughly flat with the previous quarter despite nearly absent demand for optical gear. The Telmex contract could suggest that the company's streak of steep sales declines may have ended, but analysts say any relief is likely to be temporary.

Optical sales have not suddenly rejuvenated, says Sam Greenholtz, an analyst with industry advisory and research shop CIR. "This was a one-time deal that Ciena was fortunate enough to pull off this quarter," says Greenholtz. "It does not signify a continuing trend."