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Lucent's Stock Zapped Despite Deal With TeraBeam

Lucent wants to get back into optical networking, but some question whether TeraBeam's the vehicle.

Even a big laser deal can't cut through the gloom surrounding

Lucent's

(LU)

stock.

Wednesday saw

TeraBeam

, a closely held and widely

heralded developer of wireless fiber-optic communication systems, enlist Lucent's aid in its plan to beam laser light directly into office buildings for high-bandwidth Internet access.

The agreement could put Lucent back in the game in the fast-growing, highly lucrative optical-networking area. Still, though investors have in the past cheered wildly at the very mention of TeraBeam's name, reaction to the deal Wednesday was muted at best: Lucent shares continued their recent downdraft, falling 2 to 55 7/16, leaving them just above a 52-week low that followed a January earnings

warning. And at least one analyst believes that reaction is justified by TeraBeam's technological caveats.

Joint Venture

Lucent says it will invest $450 million in cash and technology for a 30% stake in a joint systems-supplier venture with TeraBeam, which will control the rest of the equipment business. The products will carry the vaunted Lucent name.

TeraBeam's promise -- enabling big bandwidth capacity for users while bypassing the need to bury underground cable -- is enticing, particularly for a company such as Lucent, which has fallen behind in key areas of the networking business.

Lucent is a latecomer to wireless broadband access, but that was a strategic problem, says

Lehman Brothers

analyst Steven Levy. "I wouldn't say this is an indication of how desperate they are, but broadband is coming and everyone has to beef up on it," says Levy, who has a neutral rating on Lucent. Lehman has no banking ties to Lucent.

The Optical Solution

"When you look at what's going on in optical networking and how

TheStreet Recommends

Nortel

(NT)

has taken the lead in that industry segment, it's important for Lucent to look like it's staying on the cutting edge, especially in wireless," says Dave Powers, telecom-equipment analyst with

Edward Jones

, which has a buy on Lucent and a hold on Nortel and no banking ties to either Lucent or TeraBeam.

Lucent Chairman and CEO Rich McGinn was careful to cast his blessing on the venture in only the broadest of terms in a conference call Wednesday. "This high-speed-Internet-access market opportunity is huge," he said. "And TeraBeam's technology is designed to be a significant optical solution."

Significant indeed. Last month, after three years of stealth development, TeraBeam burst onto the hyperbolic Internet-infrastructure scene with a couple of headline-grabbing events. First, the company lured

AT&T

(T) - Get AT&T Inc. Report

wireless CEO Dan Hesse.

It then earned a gushing seven-page report from George Gilder, telecom's reigning tech visionary. Then shares of

Meade Instruments

(MEAD)

shot up 77% on March 15 on news that it would

supply TeraBeam with a seemingly insignificant telescopic lens for its laser-communications systems. Count tech investors as believers, it seemed.

Holding Sway?

Still, questions linger about the reliability of laser technology and whether these systems can be built as cheaply as touted, particularly in markets other than ideally situated building clusters. Engineers have been experimenting with free-space laser communications for three decades, but they have never overcome the signal disruptions caused by fog, rain, snow, birds and swaying buildings.

"This technology works in satellite-to-satellite communications, but doing it here on the ground the same way you'd use fiber-optic transmission sounds a little far out," says

Ryan Hankin Kent

optical components analyst Lynn Hutcheson, whose firm hasn't consulted for Lucent or TeraBeam. "This is one of those technologies that never caught on."

TeraBeam says it can juice up its network power to get signals though most weather conditions, and that it has a sophisticated engineering system to compensate for swaying buildings.

As for holding sway with investors, it seems Lucent has more work to do.