Agere

may soon spell agony for

Lucent

(LU)

as it strains to muscle a massive IPO through a nasty offering market.

Confronting a massive inventory overhang in the communications industry, a deep slump in tech shares and an

unforgiving IPO environment, Lucent and lead underwriter

Morgan Stanley Dean Witter

have already cut the expected price on the second-biggest IPO ever. Now, nearing the midpoint of a three-week road show aimed at drumming up support for the $6.5 billion deal, rumors have the price being cut again. Neither Lucent nor Morgan Stanley would comment on speculation regarding the communications parts spinoff's IPO terms.

Lucent, which has seen its shares fall 85% from their 52-week high, is under considerable pressure to raise cash and rid itself of debt as it seeks to regain investor confidence. Morgan Stanley also has significant incentives to push the deal, including the prospect of future business with Lucent. With those forces massed, no one expects Agere's IPO to be sidelined. But the market's skittishness could end up further reducing the price of the IPO, damaging Agere's high-profile launch.

Short Timers

Analysts speak highly of Agere chief executive John Dickson and his team, and many believe the company offers a strong long-term proposition. The company has a wealth of intellectual property and a strong position in the optical components critical to developing new network gear.

But the immediate picture is grim, say investors. Rightly or not, the Agere story has been tainted by the ongoing unraveling at Lucent.

In the past 13 months, Lucent has treated investors to five successive quarters of earnings shortfalls, repeated management blunders and sales misdeeds, the firing of its CEO, the announcement of 10,000 layoffs, a few juicy lawsuits, an 11th hour loan plea from the chairman and a pending

Securities and Exchange Commission

investigation.

Rise and Fall
Lucent over three years

Agere also isn't quite as sexy today as it was when Lucent first decided to spin off the growing unit. Over three-quarters of Agere's business is chips, making it comparable to battered outfits like

Texas Instruments

(TXN) - Get Report

and

Applied Micro

(AMCC)

. The remaining operation involves optical components, the laser-and-amplifier business common to

JDS Uniphase

(JDSU)

and

Corning

(GLW) - Get Report

. Agere is unprofitable, posting a net loss of $76 million on $4.7 billion in sales for fiscal 2000.

All these factors are reducing investors' taste for the Agere proposition. Agere officials and bankers were on a West Coast leg of the pre-IPO road show last week, trying to pump up demand for the issue, which is expected to debut by the end of the month. According to investors following the IPO, speculation has been rife that the offering price will drop close to $10 per share. Last month, Lucent lowered Agere's price range to $12 to $14 a share, from $16 to $19, while raising the share count to 500 million from 370 million, effectively offsetting the lowered price.

Dropping

One San Francisco-based money manager said he felt no compulsion as the sales team passed through town to get a piece of the IPO, thinking he could probably pick it up later on the cheap.

"Agere is tech and optical selling into the teeth of a market that is adverse to both right now," says the money manager, who asked not to be named. "We are in a period of massive inventory oversupply and in a tough period for the growth of telecom networks. I don't need to rush into this deal. In fact, when I look at how bad inventory situation is at

Cisco

(CSCO) - Get Report

, Lucent,

Nortel

(NT)

and others, I know I have time."

Another money manager, this one based in Southern California, also hears the offering price is coming down. He says it will be tough going for the Agere IPO, adding that he would "likely buy in," but only to "flip" the shares, making a quick trade to cash in on any rise in the stock price.

The Underwriting

A Lucent spokeswoman says the Agere spinoff is on schedule and is part of a strategy Lucent outlined to Wall Street that will allow the telecommunications equipment maker to concentrate on its main business. The company has already spun off

Avaya

(AV)

, its office phone and data gear unit, and there is continuing speculation that Lucent is trying to sell its fiber cable business as well.

Lucent hopes to reap $3.75 billion in proceeds from the IPO if it is priced at $13. Lucent also plans to place $2.5 billion in debt on Agere's books. In addition, according to SEC filings, Morgan Stanley so far has bought $2.2 billion of Lucent's short-term debt or commercial paper in exchange for the right to sell 200 million shares in the offering. Morgan Stanley thus needs the IPO to go well in order to get the acquired debt off its books. Morgan Stanley reportedly agreed to a 4% underwriting fee, which is substantially less than the conventional 7% take but could be offset by the size of the offering.

Nonetheless, the lengths to which Morgan Stanley was willing to go, even after banks such as

Credit Suisse First Boston

and

Goldman Sachs

backed off the deal, to gain Lucent's business brings the quality of the deal into question in the minds of some investors.

"Lucent is a big company and they knew they had a deal to do when deals were dry," says the unnamed money manager in San Francisco. "They held the bankers' feet to the fire. That doesn't speak well of Lucent or the bankers."

These issues cloud Agere's horizon and help obscure what many believe is a strong long-term proposition. Indeed, what Agere lacks is the one thing Lucent so desperately needs right now: investor confidence. The danger is that Agere debut will mar both its prospects and Lucent's.