Divide and conquer. Or, if you're
, just divide.
Pushed to action by its stock's recent flatlining while rivals' shares have doubled and tripled, the
troubled telecom-equipment maker moved Thursday to carve out its hot microelectronics business. Though some analysts derided the move as a cop-out by a perpetually short-sighted management, it's clear that this move could afford the unit the freedom -- and a hot currency -- with which to woo the engineering talent that is in desperately short supply in an ever-expanding industry.
"This is a great means of value creation," says
CIBC World Markets'
optical components analyst James Jungjohann, who has no rating on Lucent and whose firm has no banking ties to the company. Jungjohann expects the Lucent spinoff will eventually fetch a $100 billion market capitalization, roughly half of Lucent's current value.
But beyond the obvious Wall Street rationale, Lucent will also gain valuable shares to offer employees and stem defections -- a major issue for Lucent, which has taken to
dangling guaranteed stock upsides to key new employees. This new war chest could also help Lucent pursue the types of acquisitions that could fortify its weakness in emerging networking technologies.
"There is a shortage of people with the right skills," John Dickson, chief of Lucent's microelectronics group, said during a conference call with analysts Thursday. "To have a currency related to the performance of this business is going to be significant to make the relevant acquisitions ... and attract and retain the right people."
Where the Money Is
Lucent's spinoff of its semiconductor division comes at a time when investors have shown no lack of passion for companies involved with optical components and communications chips. It's also a time when the Street has thrown up its hands over Lucent's failure to seize its own optical-networking destiny.
The valuations of rivals such as
, valued at $100 billion;
, $33 billion; and
, $51 billion, suggest the spinoff could easily reap a rich valuation once it hits the public markets.
Analysts estimate the yet-to-be-named semiconductor unit, with its 39% annual growth rate and formidable customer list, will attract a sizable valuation in the public market.
If former Lucent parent
is any example, there may be risks in selling a growth division to a market perceived to be eager for tech growth stocks. As AT&T's
demonstrated, a big name doesn't guarantee success in the aftermarket.
Jungjohann, however, is optimistic. "Being a neutral, independent merchant supplier will help them," he says. That's "not as evident today, because we are in a market where demand is outpacing supply. It will be more evident down the road."