|
Lucent to spin off unit
|
 |
July 20, 2000: 3:48 p.m. ET
To float 20% of microelectronics unit; IPO may be largest in history
|
NEW YORK (CNNfn) - Lucent Technologies announced Thursday plans to spin off its microelectronics unit and float up to 20 percent of its shares in what some analysts believe could be the largest initial public offering ever, with estimates of it raising up to $20 billion.
Murray Hill, N.J.-based Lucent Technologies (LU: Research, Estimates) will launch the IPO by the end of March 2001 and complete the spinoff in a tax-free distribution of shares of the as-yet unnamed company by next summer.
Lucent, the world's largest telecommunications equipment maker, disclosed its plans as it reported earnings of $1.0 billion, or 30 cents a diluted share, for its fiscal third quarter ended June 30; edging past Wall Street's estimates of 29 cents a share. However, the telecom equipment maker warned that it may miss expectations for the next two quarters.
 Lucent's microelectronics unit, which makes silicon chips and optoelectronic components such as lasers, will be a leading provider of communications semiconductors.
The company chose to spin off the unit, which posted $4 billion in revenue over the last four quarters, because 75 percent of the unit's sales came from competitors.
"In effect, it's a case of dividing in order to accelerate growth," said Richard McGinn, Lucent Technologies' chairman and chief executive officer, in a conference call to analysts. "We are taking what is a great company within Lucent and giving it the chance to achieve its full potential outside Lucent."
The microelectronics unit, which had revenues that grew 39 percent in the third quarter, will be able to compete more effectively than it can as part of Lucent Technologies, which had revenues that grew by nearly 20 percent in the third quarter.
In the short term, a spinoff monetizes the value of the new company for shareholders but long-term prospects for Lucent Technologies aren't as bright, said analyst Martin Pyykkonen, of CIBC World Markets Corp.
"This is not as clear cut," Pyykkonen said. "You take a fairly significant growth element out of the whole. Not clear if Lucent is as attractive a stock without the unit in there."
Lucent currently accounts for 25 percent of the microelectronics unit's total output, McGinn said. The optical electronics group generated 25 percent of the microelectronic's unit revenue over the last year, with integrated circuits generating the remaining 75 percent.
McGinn said no company has refused to deal with the unit because of conflicts with the parent. However, the split will increase revenue, he said.
"If you talk to customers at Cisco, Ciena, they do see this as significant and as additional opportunity if we separated from our strategic conflict with Lucent," he said.
Lucent has been on an acquisition tear, buying 10 companies in the past year, including the $4.5 billion deal for Chromatis in May. The microelectronics unit has bought four companies in the past 18 months, including the $438 million deal for Hermann Technology in June, the $2.95 billion deal for Ortel in February, the $100 million deal for VTC Inc. in February and the $415 million deal for Agere Inc. in January.
On Thursday, Lucent shares fell 12-9/16 to 51-15/16 in afternoon trading.
Staying in Allentown
The microelectronics unit, which will remain headquartered in Allentown, Pa., currently employs more than 16,000 people in 105 locations including, Orlando, Fla., Tres Cantos, Spain, and Bangkok, Thailand.
The microelectronics unit's current CEO, John Dickson, will lead the effort to form the new company. However, he declined to discuss whether he will continue as head of the new company. Lucent plans to name the unit's senior leadership team at a later date.
"The new company will need significant involvement on my part," Dickson said. "I will be very much involved indeed."
Lucent may have purposely left open who will lead the new company, analysts said, possibly to attract candidates for the CEO spot.
"When they have the IPO, they want someone who can do a good song and dance on the road show," one analyst said, who declined to speak on the record.
The spinoff, McGinn said, will generate funds that will attract employees to the unit as well as provide revenue for further acquisitions.
A leader in communications
In the communications sector, the new company will lead in digital signal processors for wireless network infrastructure, integrated circuits for the SONET fiber-optic transmission system, wired communications integrated circuits, integrated circuits for laptop computer modems, and systems-on-a-chip.
The unit will also be a leader in the optoelectronics components sector and compete against JDS Uniphase. In integrated circuits, rivals will include Texas Instruments, Broadcom and ST Microelectronics.
Valuations for the new company range from $80 billion to $100 billion, analysts said. Similar companies, such as JDS Uniphase Corp. (JDSU: Research, Estimates), carry very high valuations, said analyst David Heger, of A.G. Edwards & Sons Inc.
"Their business has been very strong in optical components and semiconductors," Heger said.
The IPO could go for as much as $16 billion to $20 billion, analysts said, making it the largest IPO of all time and outpacing current leader Enel Spa's (EN: Research, Estimates), which launched a $16.5 billion float last November.
Verizon Communications Inc. is also expected to file for a $15 billion IPO, which could make it the third largest, for its wireless operations. Verizon, a product of the GTE merger with Bell Atlantic Corp., is now the largest phone company in the United States.
"Demand for optical technology is insatiable," Pyykkonen said. "As long as demand continues then think this deal would do well. I don't see demand to let up."
However, valuation of the microelectronics deal is still premature, said WorldFinanceNet.com's editor John Fitzgibbon Jr. Lucent has yet to file with the Securities & Exchange Commission.
"Who knows what the market will be like then or the terms of the deal," he said.
However, if Lucent's microelectronics unit had gone public now, the IPO would do well, Fitzgibbon said. On July 14, OmniVision Technologies (OVTI: Research, Estimates) -- a maker of semiconductor imaging devices for computers, communications and consumer electronics applications -- climbed 162 percent in its market debut.
"Semiconductors have always done well," Fitzgibbon said. "The question is how well."
In April 1996, AT&T spun off Lucent in a $3.02 billion deal, the biggest IPO at that time, and used Morgan Stanley Dean Witter as its lead underwriter. The odds are that Lucent will stick with Morgan as lead on the current spinoff, analysts said.
With a strong brand name and top underwriters on the deal, how investors react to it will depend mainly on how big the deal is, Fitzgibbon said.
"A five million to 10 million share deal would do well," he said. "With a 30 million to 40 million deal, it would take a lot of buying to move that sucker." 
|
|
|
|
|
 |
|
