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Analysts debate chances of a Lucent takeover

With the telecommunications equipment maker suffering from four earnings warnings and a stock price near an all-time low, rumors are swirling that the company is up for sale.

With Lucent Technologies suffering from earnings woes and a stock price near an all-time low, a new debate on Wall Street revolves around whether the struggling telecommunications equipment maker is for sale.

Some analysts believe Lucent is ripe for a takeover, while most others say the notion is far-fetched. While no companies have yet tipped their hat, speculation has pointed to players such as Nokia or Alcatel as potential buyers. Alcatel, Nokia and Lucent representatives have declined comment.

A director, familiar with the rumors regarding Nokia and Lucent, said he was unaware of any such negotiations underway.

Merrill Lynch analyst Michael Ching says Lucent is a potential takeover target, as the company is now led by an interim chief following the firing of chief executive Rich McGinn.

"Lucent management is in a state of flux under the temporary leadership of Henry Schacht, so selling the company could be a quick solution to filling a management void," Ching wrote in a recent report.

But most analysts argue that buying Lucent would cost too much--the company's current market capitalization, for example, is more than $62 billion. Also, Lucent's current financial woes could cause too many headaches for the acquiring company.

"It would be big bucks, and the stock (of the acquiring company) would get hammered because it's seen as an expensive acquisition," said analyst Seth Spalding of Epoch Partners, which predicts a buyer would have to pony up at least $60 billion.

"It would be seen as a hugely complicated matter in terms of antitrust and integration."

After years of financial success, Lucent is facing some of its most significant challenges since its spinoff from AT&T four years ago. Although Schacht is currently at the helm of the company, it is still in the process of searching for a permanent CEO, sources said.

Hit hard by a faster-than-expected decline in the sale of its traditional voice equipment and slow sales of its newer Net-based products, such as optical networking equipment, Lucent has been reorganizing its corporate structure to pare down costs.

In November the company laid off 240 employees and is considering more in the coming months.

Such problems have led many to think that the company could be an acquisition target. Yet considering the tough market for telecommunications companies, Lucent may yet be able to recover.

"Lucent is taking action to make that a temporary situation," said SG Cowen analyst Michael Jung, in regards to Lucent's financial woes.

"Management has admitted to missing some key product cycles in optical. But by recognizing those miscues, resetting expectations, and implementing a restructuring, Lucent could return some of its lost value to shareholders."

Why buy?
The company's stock is off 78 percent from its 52-week high and trading at its lowest levels since December 1997. And Lucent, which is trying to concentrate on the service provider market, plans to spin off Agere Systems, its chipmaking and optical component business, by early next year. The spinoff is looking more like a reality given that the unit filed for an IPO earlier this week.

The combination of a potentially cheap acquisition price for Lucent and the possible benefit of holding a sizable stake in what may be one of the largest U.S. IPOs may serve as a catalyst for a buyout, sources said.

3Com, for example, saw its languishing stock reach a new 52-week high as its Palm handheld device geared up for its long-awaited IPO. But after Palm debuted on the markets, 3Com's stock took a beating as the networking company moved to distribute its stake among shareholders.

Meanwhile, one former Lucent executive points to the consolidation that has been sweeping the industry. BellSouth and SBC Communications last April announced they planned to combine their wireless phone business, setting the stage to create the second-largest player in the United States. Meanwhile, Vodafone teamed up with Bell Atlantic to create Verizon Wireless last spring.

Nokia "has said it's wanted to be in the infrastructure business to maintain its lead in the handset business," see story: Lucent CEO walks tightropesaid the former executive.

And Lucent is in such a business.

Bad deal?
Analyst Steve Levy of Lehman Brothers said Lucent is a potential takeover candidate in the future, but he doesn't believe Lucent executives would sell the business without at least trying to turn the company around first.

"They're at the beginning of the restructuring," Levy said. "I doubt that they have mentally thrown in the towel yet."

The company's woes began in January when Lucent executives said the company was too slow to respond to the need for optical equipment, allowing Nortel Networks to take an early lead in the market. Optical equipment allows service providers to send larger amounts of Net traffic across their networks at faster speeds.

While the company has resolved its manufacturing problems for optical equipment, sales of the products have declined because service provider customers are still testing the equipment before deciding to buy it, Lucent executives said this fall.

Analysts say it may take two to four quarters for the company to get back on track. In the meantime, analysts say it's too risky to buy the company's stock. The company in late November said it overstated its fourth-quarter profit after $125 million in sales were recorded improperly. Lucent executives told investors to ignore an earlier first-quarter forecast while the accounting errors were investigated.

With the buyout rumors and news of the impending spinoff and IPO of Agere, Lucent's stock has shot up this week, from $15.63 to about $19. But Levy's advice to investors is not to touch Lucent's stock until company executives give Wall Street more guidance about its business.

"Anyone buying this now is buying it blind," he said. "They don't know what they're buying."