Lucent's pension funds may be providing some smoke and mirrors in the recent report of a profitable quarter. At least that's the sentiment that seems to guide one analyst's downgrade of the company's shares.
George Notter of Deutsche Bank AG slapped a Sell rating on Lucent's shares in a note he sent to clients this morning, claiming the company's pension income is making Lucent's income statement look better than it really is.
Whoa, Nellie, what's this? An analyst being a real analyst? Looks that way.
The main troubling item in Notter's report is that Lucent generated $685 million in pension income during fiscal 2003, says Notter. Pension income is not cash available to shareholders, Notter explains. Rather, it's an income statement item that shows up anytime the "assumed return on pension fund assets exceeds pension expense."
So what? "Without [Lucent's pension income], Lucent is not a profitable company next year -- despite significant operating margin expansion the Street is building into models," Notter writes.
In other words, Lucent's most recent profitable quarter -- the first in three years -- was more a product of confused accounting than a sign that the company has righted itself under Pat Russo's guidance (see Lucent's Back in Black).
Notter is not the only analyst backing away from Lucent these days. The average analyst rating on Lucent's stock is worse now than it has been in 13 weeks, according to Multex.com. Five analysts have a Sell rating on Lucent, while another 28 either rate it as a Hold or Underperform -- two of the bottom three out of five possible stock rankings.
While the company is cutting its retiree benefits quickly, some on Wall Street feel its been carrying the burden of expensive retirement plans for too long. In a recent cross-country tour, former Lucent chairman Henry Schacht complained that Lucent's retiree healthcare benefits cost some $850 million per year (see Lucent Retirees Get the Schacht). Lucent expects about $8 billion to $9 billion in revenue in 2003, and it isn't expected to break even this year.
If all that weren't enough, Notter writes that, after a seasonally strong quarter in December, Lucent's prospects look a bit dimmer after the beginning of the year.
In his note, Notter puts a $2.00 price target on Lucent's shares. In early afternoon trading on Friday, Lucent was trading down $0.16 (5.65%) to $2.67.
— Phil Harvey, Senior Editor, Light Reading
re: Notter Nixes Lucent Never thought this would ever happen, but ...
It is always very distressing to hear bad stories about Lucent. It is not clear to me why Schact was chosen by Armstrong of AT&T to be the chairman. Mr. Schacet and and Mr. McGinn totally destroyed Lucent. These two guys spent close to $75 Billion. All this expense did not bring any benefit to Lucent but drained away all the cash it had. There was never any enquiry made as to why useless acuisitions were made. Many employees who recommended acquisitions are still with Lucent.
Agree ... not sure about your 75Bill number, but I'd question why was Ascend acquired, only to drive away all the talent. I'd question why where all the product lines hosed. I'd question why Chromatis - remember that POS acquisition? - was acquired.
Lucent as a business entity is not likely to succeed because of the composition of the management team. Most of the guys in the management team do not have much background in telecommunications and because and other reasons Lucent wii not be able to compete.
Lucent "management" are nothing but a bunch of inbred ass-kissing politicians. Watch 'em dance all the way to the bank, while the retirees bleed.
re: Notter Nixes Lucent It is always very distressing to hear bad stories about Lucent. It is not clear to me why Schact was chosen by Armstrong of AT&T to be the chairman. Mr. Schacet and and Mr. McGinn totally destroyed Lucent. These two guys spent close to $75 Billion. All this expense did not bring any benefit to Lucent but drained away all the cash it had. There was never any enquiry made as to why useless acuisitions were made. Many employees who recommended acquisitions are still with Lucent.
Lucent as a business entity is not likely to succeed because of the composition of the management team. Most of the guys in the management team do not have much background in telecommunications and because and other reasons Lucent wii not be able to compete.
Lucent must reduce the size of uts workforce at least by 15,000 personnel by the end of June 2004. It should also eliminate health care and pensions for the current and past employees. The top management should be replaced by outsiders.
The Lucent Board should also be dismissed and a new board members be chosen.A Federal Judge should oversee the operation of the company.
A couple of things: 1. They had rights to some SS7 software through a licensing agreement with Stratus 2. Actually had a decent IP router software base 3. Product and income (I suppose cash flow) in the access product business was good.
I am no fan of Lucent, but Ascend was a good company with good products, widely used in the access business.
re: Notter Nixes Lucent I worked for Ascend, just before they purchased Cascade. It was a terrific time -- but it was also the bubble. Times were good in many places.
As the bubble burst, I suspect Ascend would have had its share of problems even without Lucent. Apart from the Cascade equipment, Ascend had a tough time penetrating the carriers. As the ISP's (PSI, Genuity, UUNET) went bankrupt, Ascend would probably have decended.
That said, having worked with Lucent and seen Pat Russo in action before she became CEO, Lucent has many many problems that take enlightened leadership to fix. Unfortunately, Pat Russo is not enlightened.
Hiring Pat was Schacht's biggest error and a sign of how desperate he was to exit as Lucent's interim CEO.
re: Notter Nixes Lucent I worked for Ascend right after they bought Cascade, I agree they had great access products along with the cascade ATM and Frame Relay switches it was a great match, then along came Lucent and the rest is history, all the top talent left for startups up and down Rt 495, only which there are only few left, WaveSmith(Ciena), Sycamore,Coriolis, the rest have mostly closed down.
Ascend was the best company I ever worked for until Lucent paid 20 billion $$$, then it was all over, I don't think the Lucent Westford facility will be around much longer, Customer Service is the only stronghold left there, the cancellation of too many products and the layoffs make it a virtual ghost town, I see someone like Juniper buying the ATM and Frame relay division from Lucent as they have no futher development on these products but a huge installed base among the RBOCS.....
re: Notter Nixes Lucent I have lived through an instance in which a strong company culture and committed middle managment protected a company from an incompetent CEO and his executive team. While the CEO dithered and refused to make decisions, the middle management group maintained the existing products and created profitable new ones. The CEO's main contribution was to blame all of his problems on his employees. A new ownership asked for a new strategic plan from him and fired him when they saw it.
I have also lived though an instance in which a dead weight middle management culture overcame the attempt by a CEO and owner to create the necessary change in acompany. They just developed the same products that they had been doing all along and which no one wanted to buy.
Middle management's collective culture and capabilities have a much greater effect on a company's fortunes than that of the CEO. I have no experience with Lucent but I would be surprised if its failure could be rectified by firing the CEO. Haven't they tried that already? At least in my experience, A CEO cannot overcome the limitations of the middle managment that is provided to him.
Been there, done that. I've seen what you describ,e but the company culture, CEO and middle management in Lucent is just amazing. They are all completely dysfunctional.
Group-think, better described elsewhere in these pages.
re: Notter Nixes Lucent In regard to a dysfunctional company culture and group-think, my experience is that this is a comfortable way for a group to protect its members from possible harm. New ideas are a threat to the job security of the middle management group. Change might be essential to the overall health of the company but harmful to the individual groups that make the company up.
Middle manages have achieved their career success in a specific business and technological environment. New ideas deprecate the expertise hat they have built up. There is always the strategy of learning new skills and welcoming change. There is also the strategy of collectively ignoring challenging ideas and eliminating those who bring them forward.
The second strategy is inimical to the company but beneficial to the current management incumbents. They are harming themselves in the long term but they hope that after the short term they will either have retired of the crisis will have been solved by the sacrifices of some other group.
This has been recognized in books on innovation. A prime recommendation in these books is that innovative groups be protected. This can involve the active protection of a major executive and even the creation of a new business in a new location to exploit the innovative possibility.
The lesson that I learned from this is that large groups will not change. They must be replaced. It is unreasonable to expect them to evolve to a new form. I heard this when I worked for Nortel. It was hoped that people moving into R&D would move with their product into the manufacturing side. There would a continual renewal of the R&D division while those with strong socila attachment and job security concerns would move with their product and stay with it until it was discontinued. I do not think that Nortel was able to achieve this system.
The bottom line to this is that perhaps there is a time for even large organizations to shut down and be experience of Lucent but I have seen other organizations in which this is undoubtedly true. It would have been better there and probably cheaper for ownership to set up a new organization to move into new products area than to expect a large existing organization to change.
re: Notter Nixes Lucent Yea, like their Allentown plant. Irony 101: ten minutes away from Bethlehem Steel's monument to the last century.
LU and a lot of other big corps had (still have) a penchant for picking the lowest rent district they could find, moving in, and becoming the big boy in town.
News flash to corp dead heads: it don't work that way nomo. It hasn't for decades now, but the GAAP-heads still think it does, because they breath their own poisonous fumes.
The basic reason is the speed of the economy. It's ten (make that 100) times faster than it was. Those plants have to cost even less, since they are going to be obsolete in a tenth the time.
It's already reached the point of nonsense. Cost savings have to be generated from fundamentally new ways of doing business, not (simply) cheaper sources of labor and materials.
And that is the problem with a lot of larger US companies these days: No new blood. In the case of LU, it's old blood putting up a new face to dress up old ways.
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