Lucent Dabbles Under $1
Yesterday, shares in Lucent closed down $0.06 to $0.94 on heavy volume of 106 million shares. At one point the stock, which is still one of the most widely held in the U.S., sunk as low as $0.81 per share. If the stock closes below $1 for 30 straight days, the NYSE could seek to delist the company, according to its rules.
That would put serious pressure on the stock, as it would likely become much more difficult to trade. Funds that are prohibited from owning stocks outside of the NYSE might be forced to sell their shares. And the company would likely be removed from Standard & Poor’s 500 listing, another serious blow that would hurt investor confidence.
While delisting is a possibility, analysts covering the company say it's very unlikely. There are several steps the company could take to avoid such action. In the worst-case scenario, the company could initiate a reverse stock split, whereby a company may exchange one share for several. This means that if Lucent issued one share for every three shares outstanding, it would theoretically raise the stock price to nearly $3.00.
A reverse stock split is rarely done, because it often further reduces investor confidence, according to Simon Leopold, an analyst with Merrill Lynch & Co. Inc. But other companies have done it in the past. AT&T Corp. (NYSE: T) investors okayed a 1-for-5 reverse stock split back in July of this year, but the carrier has not yet executed the plan.
Some analysts say that all this talk of delisting is premature.
“It’s really irresponsible to even talk about delisting at this point,” says Steven D. Levy, analyst with Lehman Brothers. “Lucent has a long way to go before you start talking about delisting. Besides there really isn’t much difference between trading at $1.00 or $0.90 in my mind.”
Lucent’s stock has been dropping consistently for some time. Its shares have lost roughly 93 percent of their value since Lucent began restructuring in January 2001. Two years ago the company’s market capitalization was $119 billion; now Lehman Brothers is predicting that it will only be $9 billion in the next fiscal year.
Much of the most recent drop in value was due to an earnings warning issued by the company on September 13 (see Lucent Drops Its Bottom). The company said revenues would drop 20 percent to 25 percent sequentially for the quarter that ends its fiscal year on September 30, 2002 -- down from $2.95 billion reported last quarter.
The announcement seems to have unleashed panic in the investment community, which now fears that Lucent has real liquidity issues. But Levy of Lehman Brothers and Leopold of Merrill Lynch say that these issues are a bit overblown. They agree that Lucent still has plenty of cash, and if it is able to continue to cut expenses it has an opportunity to turn things around. Neither analyst has reduced his rating to a Sell.
Patricia Russo, president and chief executive officer of Lucent, has publicly stated that the company needs to continue to cut costs. She has targeted a quarterly break-even revenue rate of $2.5 billion to $3 billion in order to reach profitability by September 2003.
But the big question now is -- what will be cut? The company has already made the easy cuts in spending, like the spinoffs of Agere Systems (NYSE: AGR) and Avaya Inc. (NYSE: AV). It has also successfully reduced its headcount from 106,000 in January of 2001 to about 45,000 today. Analysts say the company will likely have to bring that number down to as low as 30,000 to meet its targets.
“There is no easy answer here,” says Levy. “The first round was cutting the fat. The second round went a little deeper. Now they are trying to say clearly, ‘We can’t be the same kind of company that we used to be.’ And they are trying to figure out what that new company will be.”
Some investors and analysts have speculated that Lucent might try to carve out its wireless equipment business or sell off Bell Labs. But again, Leopold and Levy disagree.
“It doesn’t make sense to get rid of your R&D. Then there is no growth opportunity,” says Levy. “And the wireless stuff isn’t so easy to carve out as some of the other business units have been.”
Answers to these questions likely won’t be answered until Lucent’s fourth-quarter earnings call on October 23, 2002.
— Marguerite Reardon, Senior Editor, Light Reading