Lucent Technologies Inc. Business Information, Profile, and History

Company Perspectives:

Lucent's strategy is to meet its customers' needs by offering an end-to-end solutions platform. This strategy brings together the core products of switching, transmission, software, messaging and optoelectronics (including microelectronic componentry) with the new portfolio offerings obtained through strategic acquisitions as well as the research and development of Bell Laboratories.

History of Lucent Technologies Inc.

Lucent Technologies Inc. is the corporate descendant of AT & T's Western Electric manufacturing division, which AT & T bought in 1881. For most of the 20th century it was Western Electric that made telephones in nothing but black. Over the years it manufactured other products, including network boxes for telecommunications carriers, PBXs (private branch exchanges) for offices, and semiconductors. Bell Laboratories is also under the Lucent umbrella. Headquartered in Murray Hill, New Jersey, and formed in 1925, Bell Laboratories has a long history of innovations, from synchronizing sound and film in the 1920s to inventing the transistor in the 1940s and the laser in the 1950s. In 1999 Lucent introduced 128 products that originated in Bell Labs, and researchers there claimed more than 1,000 patents during the year--their highest number of patents ever. Lucent has complemented its Bell Labs innovations by acquiring numerous high-tech companies. From 1997 to 1999 Lucent spent more than $32 billion on some 30 acquisitions.

In 1999 the company realigned its businesses into four main groups, plus Bell Labs, which supports the other Lucent units by providing basic research and product and service development. Service Provider Networks included optical networking, switching and access solutions, wireless networks, and communications software, plus business focused on serving cable TV operators and other service providers. Enterprise Networks was responsible for voice and data solutions for business and government enterprises and included Business Communications Systems and Government Solutions. NetCare Professional Services offered services for the life cycle of a network, including planning, design, implementation, operations, maintenance, education, and software. Microelectronics and Communications Technologies consisted of the company's microelectronic business, network products, new ventures, and intellectual property. Its products include integrated circuits, optoelectronic components, power systems, optical fiber, cable, and connectivity solutions.

Beginning with $20 Billion in Annual Sales: 1995-96

At the beginning of October 1995 AT & T Chairman Richard Allen announced that AT & T would break into three separate companies. AT & T would continue as a telecommunications company offering long-distance service and wireless communications. The second company would be Global Information Solutions, which would make automated teller machines, bar-code scanners, and other computerized systems. The third would be Lucent Technologies, a company focused on network equipment, switching devices, and business communications hardware.

Lucent was incorporated in Delaware in November 1995. In February 1996 AT & T began the process of making Lucent a stand-alone company by transferring assets and liabilities related to its business. Lucent was formed from the systems and technology units that were formerly part of AT & T Corp., including the Bell Laboratories. Its core was AT & T's Network Systems Group, which manufactured complex telephone switches, semiconductors, and consumer telephone equipment. Lucent also included the former AT & T Microelectronics. Lucent would begin business with more than $20 billion in annual revenues and a workforce of 137,000 employees.

In April 1996 Lucent completed the initial public offering (IPO) of its stock. The IPO raised more than $3 billion, making it the largest IPO at the time in U.S. corporate history. On September 30, 1996, Lucent became independent of AT & T when AT & T distributed to its shareowners all of its Lucent shares. Once Lucent was separated from AT & T, it began to win large equipment contracts from telecommunications carriers who were AT & T's rivals. In October 1996 Lucent sold its interconnect products and Custom Manufacturing Services (CMS) businesses.

Lucent formed its New Ventures Group in 1996 to nurture small companies, make venture capital investments, and spin out entrepreneurial firms that could later go public. The New Ventures Group was instrumental in determining which Bell Labs inventions became marketable products. Between 1996 and the end of 1999 Lucent New Ventures created 11 companies and created syndicates of investors to spread the risk involved. At the beginning of 2000 Lucent said it planned to launch at least five new companies each year.

Series of Acquisitions and Mergers Beginning in 1997

Richard McGinn succeeded Lucent's CEO Henry Schacht in October 1997 following Schacht's retirement. McGinn had joined the old AT & T's Illinois Bell as a salesman in 1969. By 1993 he was in charge of AT & T's Network Systems Group. When Lucent was separated from AT & T in 1996, the AT & T board selected Schacht, former head of Cummins Engine and a favorite of Wall Street, over McGinn. Until Schacht's retirement, McGinn served as number two under Schacht.

Under McGinn, Lucent began a series of acquisitions and mergers that continued through 2000. Through early 2000 Lucent spent $32 billion in stock and cash to acquire or merge with 30 companies. McGinn also sold off some of Lucent's businesses and refocused the semiconductor unit on digital signal processors instead of commodity chips.

Lucent's first acquisition since becoming an independent company took place in September 1997, when the company acquired Octel Communications Corporation, a provider of voice, fax, and electronic messaging technologies, for $1.8 billion in stock. In December 1997 Lucent acquired Livingston, a global provider of equipment used by Internet service providers (ISP) to connect their subscribers to the Internet, for $650 million.

In October 1997 Lucent contributed its Consumer Products business to a new venture formed by Lucent and Philips Electronics N.V. in exchange for a 40 percent interest in the venture, which was called Philips Consumer Communications. The venture was formed to create a worldwide provider of personal communications products. A year later Lucent and Philips announced their intention to end the venture, which was terminated in late 1998. In December 1998 Lucent sold certain assets of its wireless handset business to Motorola. Since then, Lucent has continued to look for opportunities to exit the consumer products business.

During 1998 Lucent acquired the following companies: Prominet, a participant in the emerging Gigabit Ethernet networking industry, for $200 million in stock; Optimay GmbH, a German-based software developer for chip sets to be used for Global Systems for Mobile Communications cellular phones, for $65 million; Yurie, a provider of asynchronous transfer mode (ATM) access technology and equipment for data, voice, and video networking, for $1 billion; SDX, a U.K.-based provider of business communication systems, for $200 million; MassMedia, a developer of next-generation network interoperability software that manages connections across data, voice, and video networks; LANNET, an Israel-based supplier of Ethernet and ATM switching solutions, for $117 million; JNA, an Australian telecommunications equipment manufacturer, reseller, and system integrator; Quadritek, a start-up developer of next-generation Internet protocol (IP) network administration software solutions, for $50 million; and Pario Software, a maker of network security software. By acquiring a large number of data-network equipment and software companies, Lucent was positioning itself to compete with companies such as Cisco Systems in building multiservice networks that could support voice, video, and data traffic.

Lucent continued to acquire similar companies in 1999: WaveAccess, an Israel-based developer of high-speed systems for wireless data communications, for $54 million; Kenan Systems Corp., a software developer for third-party billing and customer care, for $1.48 billion in stock; Sybarus, a semiconductor design company; the Ethernet LAN component business of Enable Semiconductor for $50 million; and Ascend Communications, a developer, manufacturer, and seller of wide area network (WAN) solutions, for more than $20 billion in stock. With the acquisition of Ascend Communications in 1999, Lucent became the leader in both voice and data for service providers. An estimated 70 percent of the world's Internet traffic traveled over Ascend equipment in 1999.

Additional acquisitions in 1999 included: Nexabit, a developer of high-speed switching equipment and software that directs traffic along telecommunications networks, for $900 million; Mosaix Inc., a provider of software that links a company's front and back office operations to help them deliver more efficient customer service, for $145 million in stock; 61 percent interest in SpecTran Corporation, a designer and manufacturer of specialty optical fiber and fiber-optic products; International Network Services (INS), a global provider of network consulting and software solutions, for $3.7 billion in stock; Excel Switching Corp., a provider of open switching solutions for telecom carriers, for $1.7 billion in stock; and Xedia Corporation, a developer of high-performance Internet access routers for wide area networks (WAN), for $246 million.

Continued Profitability: 1996-2000

From 1995 to 1999 Lucent's revenues rose from $21.7 billion to $38.3 billion. After reporting a net loss in 1996 of $230,000, Lucent improved its profitability over the next three years with net incomes of $150,000 (1997), $340,000 (1998), and $1.52 million (1999).

For fiscal 1999 revenues improved across all segments for Lucent. For Service Provider Networks revenues rose 23.3 percent, or $4.45 billion, to $23.56 billion; revenues from Enterprise Networks rose 7.6 percent, or $605 million, to $8.56 billion; revenues from Microelectronics and Communications Technologies rose 17.2 percent, or $796 million, to $5.42 billion.

Since its initial public offering in 1996, Lucent stock increased 11 times its original value, or 1,100 percent, by the end of 1999. It had surpassed AT & T to become the United States' most widely held stock, with 4.6 million shareholders. When the company's first quarter results for fiscal 2000 fell short of analysts' expectations, however, its stock lost 28 percent of its value in one day, January 5, 2000, reducing the company's market capitalization by approximately $65 billion.

In the following months the stock regained much of its value. The company reported, however, that it was aware of at least 12 class-action lawsuits filed on behalf of persons who purchased Lucent's common stock between late October 1999 and January 6, 2000, claiming that Lucent and certain of its officers misrepresented Lucent's financial condition and failed to disclose material facts that would have an adverse effect on Lucent's future earnings and prospects for growth.

Lucent attributed its shortfall for the first quarter of 2000 to its inability to meet demand for new optical networking products and delays in customers deploying their new network equipment. Analysts noted that Lucent had misread the shift in demand to fiber optics, which provided more bandwidth, and then reacted too slowly to stop its customers from defecting to chief competitor Nortel Networks.

Analysts were mixed in their outlook for Lucent. Neil Weinberg of Forbes wrote, 'Lucent is well poised to help lead an optical revolution that will whip information around the globe at a fraction of today's cost.' He noted that big mergers such as America Online and Time Warner would only increase the demand for Lucent's products and services. Although the company's reputation had been sullied by its first quarter results, analysts foresaw a surge in spending on telecommunications equipment over the next four years. Meanwhile, Lucent was investing heavily to increase its fiber-optic production capacity.

As part of Lucent's strategy to focus on high-growth markets, the company announced at the end of February 2000 that it would spin off its private branch exchange (PBX), cabling, and LAN (local area network) business segments later in 2000 into a new company that would be headed by Lucent CFO Donald Peterson. Those segments represented Lucent's slower-growing corporate networking businesses. Although those business segments were profitable and exceeded growth rates in their markets, they did not fit Lucent's aggressive growth profile. The new company would include most of Lucent's enterprise equipment, and Lucent's channel partners supported the concept of being able to deal with a smaller business entity.

Continued Acquisitions in 2000

In the first quarter of 2000 Lucent acquired Agere Inc., an Austin, Texas-based maker of programmable network processors, for about $415 million. It also acquired Ortel Corporation, the second largest producer of lasers used for video in cable TV networks, for about $2.95 billion in stock. Lucent planned to use Ortel to supply interactive television equipment to large cable operators, such as AT & T, to enable them to transform one-way broadcasting systems into interactive two-way communications networks.

Although Lucent was best known for its networking products, the company also was involved with other emerging technologies. In the field of digital music Lucent developed the ePAC (enhanced perceptual audio coder) to deliver high-quality sound in a safe and secure environment. Lucent was one of the founding members of the Secure Digital Music Initiative, an industry group of more than 140 companies and organizations that worked to support the rights of content owners who wished to deliver music securely over the Internet. Lucent licensed its ePAC technology to a wide range of music companies, from record labels to makers of downloadable players.

Internet video was another new field in which Lucent was active. In March 2000 Lucent formed a new company called GeoVideo Networks, which was 40 percent owned by Lucent New Ventures Group, to create the first video network designed for the Internet. The network would allow users to share video between remote locations. GeoVideo planned to stream high-definition TV, a much higher-quality video than was presently available over the Internet.

Principal Divisions: Service Provider Networks; Enterprise Networks; NetCare Professional Services; Microelectronics and Communications Technologies; Bell Laboratories.

Principal Competitors: Alcatel USA Inc.; Bay Networks Inc.; Cisco Systems Inc.; Fujitsu America Inc.; JDS Uniphase Corporation; Nortel Networks Corporation; Siemens Corporation; Sycamore Networks Inc.

Chronology

• Key Dates:

• 1995: Company is incorporated in November.
• 1996: Structural transformation is completed when Lucent Technologies is formed from the systems and technology units, including Bell Laboratories, that were formerly part of AT & T; IPO occurs in April.
• 1997: After reporting a loss in 1996, Lucent becomes profitable with net income of $150,000.
• 1999: Amidst numerous acquisitions, the merger with Ascend Communications ranks as the company's largest to date and catapults Lucent into the leadership position for providing voice and data to Internet service providers.