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Lucent spinoff looks to grab cash from Cisco, others

The company is spinning off its chipmaking and fiber-optics component business for one big reason: to make more money off Cisco Systems, Nortel Networks and other rivals.

Lucent Technologies is spinning off its chipmaking and fiber-optics component business for one big reason: to make more money off Cisco Systems, Nortel Networks and other rivals.

Lucent's microelectronics unit, which made $4 billion in sales in the past year, is one of the largest chipmakers for communications devices such as cell phones and back-end network equipment. It also sells optical components used to build the gear that allows Internet service providers to send Net traffic across their networks at faster speeds.

The spinoff, announced today, will ease conflict-of-interest concerns and help increase the sale of chips and optical components to rival network equipment makers Cisco, Nortel and others, Lucent chief executive Richard McGinn said.

"The microelectronics business has previously operated with quite a bit of autonomy, and it sold a lot to Lucent's competitors on the equipment side. But they've always had concerns about helping Lucent," said Dave Passmore, an analyst with industry consultants The Burton Group. "Lucent is trying to get out of the business so they don't run into competitive problems."

That's the same reason AT&T originally spun off Lucent into a separate company in 1996, Passmore said.

"If you're selling to Ericsson, Nortel, Cisco or others, they're unlikely to give you the business they want to give you if you're part of a company that has a Lucent logo on it," McGinn said at a press conference. "When it has full independence, you'll see continued growth in the business."

About 75 percent of the microelectronics unit's sales already come from rival networking equipment makers, with the remaining 25 percent in revenue coming from within Lucent.

Lucent's networking rivals have been hesitant to buy more chips and optical components from Lucent, turning instead to suppliers such as Broadcom and JDS Uniphase, McGinn said. The microelectronics business grew about 38 percent last quarter, and its independence will help spark more sales, he said.

Analysts say Lucent's spinoff strategy is indicative of runaway demand in the optical market and will boost the microelectronics unit's revenues, as well as increase the value of Lucent's shares. Lucent's optical component sales grew 80 percent over the past year, Lucent executives said.

Company executives plan to hold an initial public offering for up to 20 percent of the new company in the first quarter of 2001, with the remaining shares spun off by next summer. The new company, still unnamed, will be headed by John Dickson, executive vice president and chief executive of the microelectronics unit. It will have 16,000 employees and will be based out of Allentown, Penn.

Turning the microelectronics business into an independent company follows Lucent's previous decision to spin off its slow-growing corporate networking business, now called Avaya.

Analysts say Lucent's decision to get smaller is a good move. It gives Avaya and the microelectronics unit room to grow, while allowing the remaining company to focus on its fast-growing telecommunications business, said Argus Research analyst David Toung.

"The spinoff of the (Avaya) unit is good for Lucent because they are divesting a slow-growth, mature company that is a drag on corporate growth," Toung said. "You're getting rid of a ball and chain."

Toung predicts that the microelectronics spinoff will do well on Wall Street. Broadcom's share price is in the low $230s, while JDS Uniphase's stock price is about $128.

"The microelectronics business is a fast-growing business, and its products are in great demand," he said. "The spinoff will be beneficial to shareholders because they will realize more value. And for the company, they can use that to attract and retain employees and use that for acquisitions."