The AT&T spin-off is poised to gobble up a large networking company in hopes of capitalizing on the convergence of voice and data networks.
Since its spin-off two years ago from AT&T, telephone equipment maker Lucent has been restricted by the terms of its separation from the telecommunications giant to swallowing smaller players. But starting in October, Lucent will be able to use the "pooling of interests" method of deal-making, an accounting method that will allow for stock-swap takeovers, which ultimately lower the cost of making acquisitions.
High-tech companies increasingly have been using their currency to make acquisitions, fueled largely by the recent run-up in the stock market. Now Lucent can join the pack.
"Lucent has done several small, tuck-in mergers because they couldn't use the 'pooling' treatment yet," said Linda Varoli, an analyst with Merger Insight, a market research service. "It is an open secret that come October, Lucent will go shopping."
While Northern Telecom's acquisition of Bay Networks has been played as a move by which the companies can gain better position in the converging industries, the acquisition also widely was viewed as an attempt by Nortel to get a "a jump on Lucent before [it] could use pooling treatments" to acquire Bay itself, according to Varoli.
Analysts almost unanimously agree that Lucent's No. 1 takeover target will be Ascend Communications.
"[Lucent] will have to flesh out its remote access products," said Aydin Tuncer, an analyst with S&P Equity Group. "They already have one product line in that area, but may want to move into another line that is a bit more higher-capacity. That's why a lot of people are talking about Ascend Communications being a popular takeover target."
Just last month, Ascend acquired Stratus Computer, a move that some in the industry say was designed to make them a less appealing takeover candidate for Lucent.
"I think, if anything, it would make Ascend even more attractive to Lucent," said Varoli. "[Ascend] has so much technology that is more up-to-date, and it didn't really become big enough to ward off Lucent."
A Lucent shopping list prepared by analysts who follow the AT&T spin-off is likely to continue growing.
"I think that cable modems is one area [Lucent is] weak in," said Bruce Carlsmith, an analyst at NationsBanc Montgomery Securities. "I would also look into the data area generally, and they need a great router presence."
Although Lucent already has a strong [DSL] product line, Tuncer said he thinks they still will need to beef up in order to compete in that sector.
"Cisco is definitely breathing down Lucent's back in that area," he said.
Some other companies mentioned as possible takeover targets are Westell, for its DSL technology; and Com21, Cabletron, and 3Com in the modem arena . Even Tellabs, which is moving to acquire telecom equipment provider Ciena, is a remote possibility, though most feel it is too large to be acquired by Lucent.
Without the use of this preferred accounting practice, Lucent has resorted to acquiring nearly a half-dozen small companies in less than a year. In July, Lucent acquired switch technology maker LanNet for $115 million in cash, SDX Business Systems for about $200 million in cash, and Australian telecom equipment maker JNA Telecommunications Limited for $70 million in cash.
Earlier in the year, Lucent moved to acquire Yurie Systems and Prominet Corporation.
"I think it is in Lucent's best interest to wait until October and not saddle itself with an incredible amount of goodwill debt," said Varoli.
In either case, the stock market has been bullish on Lucent and its ability to weather the coming convergence competition. The stock has risen steadily since 1996 from about 20 to as high as 108.5. Lucent closed today at 87.81, up 2.26 percent.