Cisco, Sycamore Circling Lucent's ATM

Lucent Technologies Inc. (NYSE: LU) is in the midst of a negotiating a deal to sell its telecom data switching unit based in Westford, Mass., sources close to the company say.

The leading contenders for the kit, which would include core and edge switching gear based on Asynchronous Transfer Mode (ATM) and Frame Relay technology, are Cisco Systems Inc. (Nasdaq: CSCO) and Sycamore Networks Inc. (Nasdaq: SCMR), say the sources. Alcatel SA (NYSE: ALA; Paris: CGEP:PA) may also be interested. The price tag could be as low as $200 million or as high as $600 million, according to several experts.

"It sounds like it's moving along quickly," says one financial source close to the company, who asked not to be named. "Cisco can bid the most and wants it the most, and Lucent is pretty desperate."

The Westford unit has its roots in Cascade Communications, a company whose business Lucent acquired through its purchase of Ascend Communications in 1997 (Ascend had acquired Cascade earlier in the same year). The business, which includes the GX 550, CBX 500, and PacketStar (PSAX) core ATM/IP/Frame Relay switches are installed in a large number of top-tier RBOC and incumbent telecom carrier networks throughout the globe.

Two other independent sources with contacts at Lucent say a deal is in the works; one said the board met last Friday but that things could still fall apart.

Lucent and Nortel Networks Corp. (NYSE/Toronto: NT) are widely regarded as the leaders in the multibillion-dollar multiservice and ATM switching markets, according to a recent Optical Oracle, as well as several market research firms. Cisco is running either third of fourth in the market, depending on how you rank them (it vies with Alcatel).

"Lucent and Nortel kind of ping-pong back and forth as leaders in the core ATM market," says Kevin Mitchell, an analyst at Infonetics Research Inc. "Cisco is a leader in the edge, with Nortel strong too. It would make sense [for Cisco] to acquire their core business for the customer contracts, but not the products. Lucent has ignored ATM product development for a while."

Lucent is motivated by its need to further downsize and its thirst for cash, say several Wall Street sources.

"We think the deal would be a win/win because Cisco doesn't have good penetration into RBOC accounts, and Lucent could strike a deal with Cisco to do professional services," says UBS Warburg analyst Nikos Theodosopoulos, when asked whether such a deal would make sense.

Theodosopoulos wrote in a research note issued on October 17 that Cisco should buy Lucent's ATM switching unit; he pegged the deal at 0.5 to 1 times revenues, and estimated those revenues to be as much as $600 million in cash. The note got the rumor mill grinding, but Theodosopoulos says that at the time he had no specific knowledge of an impending deal. "We didn't write that note based on industry buzz, it was based on Lucent's need to downsize," he says.

In an earnings call earlier this week, Lucent CEO Patricia Russo said the company will continue to invest in and support the ATM switching line (see Lucent Clarifies Product Strategy). At the same time, however, the company needs to lay off an addition 10,000 employees, and many are skeptical she can attain such streamlining without shedding entire divisions.

In addition to raising cash, the deal might be part of Lucent's higher-level move toward a services business model.

"Lucent is trying to focus on professional services," says Theodosopolous, adding that if Lucent sold the ATM switching business, it would likely strike a deal with Cisco to provide professional services and support to the business.

Lucent declined to comment on this article; Cisco and Sycamore Networks had not returned calls at press time.

In morning trading, Lucent shares were down $0.03 (3.06%) to $0.95; however, they've risen 35 percent this week.

— R. Scott Raynovich, US Editor, Light Reading
www.lightreading.com Want to know more? The big cheeses of the optical networking industry will be discussing multiservice switches at Lightspeed Europe. Check it out at Lightspeed Europe 02.

Editor's Note: Light Reading is not affiliated with Oracle Corporation.
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real_class2001 12/5/2012 | 3:10:50 PM
re: Cisco, Sycamore Circling Lucent's ATM I hear from a managing director at the Westford facility that the plant may be sold and many employees will be terminated. The first sign is the sell off of various data units and what appears to be a shifting focus by ALU to consolidate facilities and streamline overlapping products.

wilecoyote 12/4/2012 | 9:28:42 PM
re: Cisco, Sycamore Circling Lucent's ATM Dan, you know if you don't do this deal Sycamore is dead. Maybe you're rich enough not to really care about what happens at Sycamore but there are many families that are relying on your leadership. You owe it to them to find a way to make Sycamore successful.


The irony here is really thick: you get another shot at making Cascade a winner. How can you pass this up?
mu-law 12/4/2012 | 9:28:38 PM
re: Cisco, Sycamore Circling Lucent's ATM They have invested heavily in integrating stratacom/axis. CBX/GX has been in neutral since they were purchased, and everybody quit.

The only motivation for Cisco would be to keep this out of somebody else's hands... and if you believe what Volpi tells LR, this wouldn't be enough a motivation... certainly not for $600MM. ALA would have to admit defeat, and Nortel would have to understand the ATM market. The only one without a partner now is Siemens...

Regardless, I don't think ANYBODY would pay $600MM for this gear (or the people) now.

farmboy 12/4/2012 | 9:28:33 PM
re: Cisco, Sycamore Circling Lucent's ATM It is no wonder Lucent is thinking about getting out:

Lucent has been gradually losing market share in ATM/multiservice switch market. Lucent went from 27% market share globally to 23% (2Q01- 2Q02).

In North America, where Lucent was supposedly strongest, they have again been struggling. They dropped from 44 to 36% share (2Q01 - 2Q02) -- a loss of 8 percentage points!

Nortel has been the main recipient of the market share gains.

All statistics from Synergy Research.
Belzebutt 12/4/2012 | 9:28:32 PM
re: Cisco, Sycamore Circling Lucent's ATM and Nortel would have to understand the ATM market.

Nortel is the clear leader in this market (and gaining share) so I think they understand it well enough.

Interestingly, didn't Pat say that ATM is one of the "core businesses" of Lucent and it's a keeper? Just shows you that they're all liars, damn liars...

wilecoyote 12/4/2012 | 9:28:31 PM
re: Cisco, Sycamore Circling Lucent's ATM Here's why they are losing share:

1) LU sales people who were any good chased their pipedreams in optical companies. They are all gone.
2) LU management doesn't know a good thing when they see it. They're too busy closing down their monumentally stupid acquisitions.
3) They are busy trying to fight for survival and not investing in the segment. Trying to milk a cash cow.

Where does Equip sit in all this? I know they don't have any customers but if I was Sycamore or CSCO I would buy them along with the Cascade stuff to make sure I had a next-gen box to go along with my cash cow 1995-built stuff. No I don't have Equip stock. Wish I did though. LR missed that one.
orange 12/4/2012 | 9:28:30 PM
re: Cisco, Sycamore Circling Lucent's ATM He'll need to replace work force if he wants to relive the glory days. Lucent has ex-5ESS people running the show now, which may be why there has been nothing new for a while. But if Dan puts up a help-wanted sign out front, most of us would be back.
moedog 12/4/2012 | 9:28:28 PM
re: Cisco, Sycamore Circling Lucent's ATM Why would Cisco buying Lucent ATM be a good deal. Most Lucent ATM products are about end of life or should be. Most Lucent deployments at major SP accounts are capped with only existing inventories being used. RFP's are all over the street for Next Gen Edge and Core. Cisco's MGX platform has never had much acceptance at any ILEC's so why would they put it in the network now. This is a non starter. Cisco culture of margin protection does not lend itself to any serious ILEC penetration even if they buy market share.

Like I said, this dog don't hunt.
StartUpGuy1 12/4/2012 | 9:28:23 PM
re: Cisco, Sycamore Circling Lucent's ATM This dog might hunt if you look at it as a way to secure "footprint" at major RBOC's and PTT's that you can replace with Multi-service gear in the next 36 months. It is a lot easier to "upgrade and augment" than "forklift", even if you do have to replace the stuff. The only fly in the ointment is the purchase and support contracts that Lucent has with the RBOC's on this gear. Knowing their history, they are probably not a good deal for the company.
phobin 12/4/2012 | 9:28:23 PM
re: Cisco, Sycamore Circling Lucent's ATM Could Juniper have a shot at this?? Can they absorb the debt load after buying Unisphere?

Juniper could really use to continuing rounding out its portfolio.

Anyone have comments??
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