An Earlier Att Spinoff Sputters

Lucent technologies burst onto the scene in 1996 and quickly became Wall Street's golden child. The telecommunications-equipment maker was the supplier of choice for one of the fastest-growing sectors of the economy. A year later, the company tapped Richard McGinn--an AT&T veteran so aggressive he once plunged into cold water to untangle his fishing line rather than lose his catch--to be its CEO. And McGinn managed to hook Wall Street. By 1999, Lucent's stock price had climbed to more than $77 a share from only around $7 at its IPO, and McGinn was predicting 20 percent revenue growth a year.

The good times didn't last. Last week, after failing to meet earnings expectations for the fourth quarter in a row, Lucent ousted the fiery McGinn. "The board felt a different set of skills were required in this stage of the company's life," said Michelle Davidson, a Lucent spokeswoman. The move came the same week that AT&T, which spun off Lucent in 1996, unveiled its latest break-up plan. And Ma Bell's new offspring might do well to take some lessons from the once-precocious Lucent. In the fast-moving telecom world, misreading the market can be lethal. Ask Lucent, which failed to anticipate a major shift in the industry from voice telephone calls to Internet-age data transfer. Says CIBC World Markets analyst Jim Jungjohann: "This company is worth more dead than alive."

What went wrong? Analysts say Lucent's downturn was the result of an Old Economy lack of agility, coupled with the kind of hubris that comes from instant success in the New Economy. The company got off to a fast start selling equipment like switches that help carriers connect telephone calls to traditional phone companies like its former parent. Its R&D division, Bell Labs, was considered a powerhouse of innovation. In its 75-year history, Bell scientists had invented the transistor, the UNIX operating system and the touch-tone phone, along with some 40,000 other devices. But Lucent was so busy catering to AT&T that it ignored the needs of other, more advanced carriers and failed to anticipate the telecom industry's major information-age shift. Nimble rivals like Ontario-based Nortel Networks were quietly positioning themselves to clobber Lucent by developing high-speed fiber-optic systems better suited for data transfer. The strategic error devastated Lucent: engineers defected en masse as sales for the older products slowed. By last week Lucent's stock had dropped more than 70 percent this year.

There's no obvious quick fix for the damage. Most agree that Lucent will have to increase the speed with which it turns raw research into marketable products. In the meantime, Lucent's new boss, former chairman and CEO Henry Schacht, told employees in a letter that "our issues are execution and focus, and they are fixable." But he admits that he'll have to cut some jobs and that 2001 will be a rebuilding year. And the company plans to go ahead with a spinoff of its microelectronics division to narrow its focus. But spinoffs aren't a magic bullet, as Lucent's troubles prove. In the breakneck telecom world, AT&T's latest offspring will need to do more than just spin off. They'll also need to spin fast.

An Earlier Att Spinoff Sputters | News