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McGinn Backed Lucent Competitor

Light Reading
News Analysis
Light Reading
10/24/2000

Richard McGinn's days as Lucent's leader are over, but he isn't done profiting from his connections -- possibly at his former company's expense.

The former Lucent Chairman and CEO stands to make a hefty return off a potential IPO from Zhone Technologies Inc. (see Zhone Files for IPO), a direct competitor to Lucent that he backed as an individual during his reign as Chairman and CEO of Lucent.

McGinn is named as a partner in a limited investment partnership, called the Zhone Techologies FF LLC, in Zhone's S-1 filing with the Securities and Exchange Commission. The S-1 provides no details about how much McGinn personally invested or how many shares of Zhone he holds, although one source close to Lucent puts the investment in the "millions." Curtis Sanford, former president of internetworking at Lucent (see Lucent Loses Two Big Names ), is also among those listed as partners in the LLC.

Two sources in the industry confirmed they had heard of McGinn's investment in Zhone and expressed dismay at the situation. The sources questioned McGinn's judgement in making a personal investment in a company that aims to sell several products into Lucent's market.

"He should have been prohibited by the board from doing that," said one venture capitalist, asking to remain unnamed. "Any CEO in a publicly traded company has a fiduciary responsibility to the shareholders first and foremost. Any personal investment in a competitor is a conflict of interest."

The fact that McGinn had such an opportunity may come as no surprise -- he is friends with Zhone founder and CEO Mory Ejabat, who was the former CEO of Ascend Communications Inc., a company Lucent acquired in 1999 for $24 billion.

Lucent is listed under the "Risk Factors" as a competitor in Zhone's S-1, filed last week. Zhone is a high-profile startup in the telecommunications industry and stands to achieve a multibillion dollar valuation if and when it goes public. Since being founded, the company has raised over $500 million and hopes to raise another $345 million in an IPO.

It plans to launch several products that will directly compete with Lucent's offerings by the end of the year. Specifically, it says that its Broadband Access Node 100 (BAN 100) will incorporate a DSLAM, access switch/router, and broadband subscriber management system (SMS), while supporting the features of a Class 5 voice switch and frame relay access device (see Zhone Details Product Strategy).

Zhone has also hired a number of employees from Lucent.

A Zhone spokesperson would not confirm the investment, referring instead to information in the S-1. He noted that McGinn and Ejabat are friends, which may have led to business relationships. "Rich and Mory have known each other for a long time," said Tim Donovan, spokesperson for Zhone.

Light Reading was unable to contact McGinn for comment.

-- R. Scott Raynovich, executive editor, Light Reading http://www.lightreading.com

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