A Telecom Takeunder

The most amazing thing about the proposed takeover of Lucent by Alcatel is what it says about the state of Lucent’s business.

The latest word on the negotiations is that it values Lucent at 9.09 a share. That’s 21% below Lucent’s recent high of 11.50 (and a stunning 89% below Lucent’s all-time high of 84.19 reached in December 1999). In Wall Street parlance, that’s a takeunder, not a takeover, and it shows what little confidence Lucent Chairman and CEO Henry Schacht has in his company’s ability to recover from its woes, now in their 17th month.

Takeunders can derail a stock market rally because they are a stark statement by corporate insiders that their shares are fully valued, if not overvalued, at their current prices. Because of its long-running woes, Lucent is not likely to derail this rally, but the Lucent-Alcatel deal could cause investors in the telecom equipment sector to rethink the valuations of other companies.

The problems aren’t just Lucent’s anymore. The number two telecom equipment company, Nortel , is experiencing serious cash-flow problems, enough for Merrill Lynch to raise its risk rating on the stock. And router king Cisco Systems lost money last quarter for the first time ever. The slowdown in the sector has been as breathtaking as its ascent, as the easy money and credit that added fuel to the rise dried up.

But the takeunder of AT&T spinoff Lucent by France’s Alcatel for $9 a share isn’t just about the telecom equipment sector’s troubles, which are daunting indeed. It is also a watershed moment in U.S. technological history. The fabled Bell Labs, one of the great U.S. technological institutions, could soon pass into foreign hands. While that no doubt will raise some security issues, it is a stunning turn for the research lab that was instrumental in the development of the telephone, records, motion pictures, television, the transistor, the laser, and countless other innovations of the last 76 years.

And when the company behind all those inventions makes such a bold statement about the state of its business, investors and analysts should listen. Unlike Richard McGinn, whom Schacht both preceded and succeeded, Schacht’s control of the company has never been questioned. Investors should listen, and begin thinking about a recovery for the telecom equipment sector some time in 2002, rather than in the second half of 2001.