Lucent's Agere Files for IPO

Lucent Technologies Inc. (NYSE: LU) gave woeful investors something to look forward to in the New Year with today's announcement that its newly named microelectronics division, Agere Systems, has filed for a $100 million initial public offering with the Securities and Exchange Commission (see Lucent Christens Its Spinoff and Analysts to Investors: "Buy Lucent" ).

Proceeds from the IPO will be used for working capital, capital expenditure, debt service, and potential acquisitions. Morgan Stanley Dean Witter is the lead underwriter.

The microelectronics group at Lucent has been the over-achieving, golden-child in a family of disappointing lines of business over the last 18 months. Its revenue for 2000 was about $4.7 billion, a steady improvement over 1999 revenues of $3.7 billion. But the group experienced losses of $76 million for the first time in 2000 versus a reported net income of $351 million in 1999.

Epoch Partners estimates that Agere will be worth $60 billion or $14.89 per Lucent share, according to a report recently written by Seth Spalding, director and senior analyst for the firm:

“Lucent's decision to spin off its Microelectronics (ME) unit highlights the underlying value of Lucent's Service Provider (LUSP) segment. In our opinion, [it] is far undervalued relative to its comparables group. Investors should take comfort that there is little downside risk in the stock. We believe that the risk-reward tradeoff is sufficient to recommend purchase at current prices,” writes Spalding in his report.

Essentially, Lucent is relinquishing any affiliation or control of the microelectronics division. This is good news for Lucent shareholders, who have watched their stock plummet nearly 80 percent over the last year. The planned spinoff calls for Lucent to distribute Agere shares to its stockholders by the end of the fiscal year 2001, which ends next September. The remaining stock will be sold to the public.

This is different from what Nortel Networks Corp. (NYSE/Toronto: NT) is proposing for its component spinoff. Nortel plans to retain part ownership of the newly formed company. This means that Nortel shareholders will own a portion of the spinoff through their Nortel stock but will not hold shares in the new company outright, unless they purchase shares on the public market.

According to analysts, Lucent has made the right choice. Historically, investors realize greater value when an entity is completely spun off, says Spalding. Take 3Com Corp. (Nasdaq: COMS) and Palm Inc. (Nasdaq: PALM) as an example. Since Palm went public back in March, its market capitalization has grown to $31.4 billion, nearly nine times that of its former parent 3Com, which has a $3.6 billion market cap.

“It’s certainly been a good deal for Palm,” says Spalding. “Lucent’s underlying microelectronics business has been doing really well. Agere is separating from all the old management and product development problems that have affected the systems part of the business.” But a full separation from Lucent also has a potential downside: Agere won’t be able to capitalize on developments coming out of Lucent’s research and development arm, Bell Laboratories.

“If our separate research efforts are not as successful as when we were part of Lucent, we may not be able to keep pace with the rapid technological change,” reports Agere in the risk factor section of the S-1.

Additionally, some of the $4.7 billion in revenue reported in the S-1 was realized from licenses granted by Lucent, which will stay with Lucent after the divestiture. This, coupled with the fact that many companies are expanding their own patent portfolios, means revenues could be adversely affected in the future.

“Given the generally high gross margins we derive from our licensing revenue, if our licensing revenue decreases, our gross margins may be adversely affected,” says the S-1.

Regardless, the risks seem minimal compared to the potential upside, say analysts. Lucent’s stock was up about 6 percent to $16 a share in midday trading.

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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