Lucent Technologies, and Their Drop From a

¶ … Lucent Technologies, and their drop from a top-Rated company to one in danger of bankruptcy. WHAT WENT WRONG At one time, Lucent Technologies was the most widely held stock in the United States. Therefore, when they issued an earnings warning in 2000, most of the financial world was shocked. How could Lucent lose money? Some advisors were not caught off guard, and had been warning about Lucent for months, including the Motley Fool.

What happened to Lucent, and can they recover? Some background on Lucent is necessary to understand their fall from grace. Lucent formed out of the old Bell Laboratories, "the research and development arm of AT&T that has spawned such telecommunications technologies as the T-1 circuit, digital signaling, and the Private Branch Exchange (PBX), upon which the majority of office telecommunications environments are currently run" (Richey, Mann, and Gardner).

While they invented just about all the modern communications technologies, most of their business is still based on voice, circuit-switched networks, rather than newer digital technologies. The bottom line is, they have not kept current with market trends, and are still highly involved in "old-age" technologies. "To put it simply, Lucent's management screwed up. They mis-executed on a number of fronts, including manufacturing bugaboos and being out of touch with their customers' technology needs" (Richey, Mann, and Gardner).

Sales at Lucent had flattened out for several quarters, however inventories and accounts receivables continued to climb, which puts the business out of balance. They are not selling enough to warrant higher inventories, and they are not collecting revenues quickly enough on what they have already sold. This is one reason Lucent began to have troubles, and had to issue warnings about their projected revenues. Another major reason is the more than generous credit terms they were offering customers.

These terms allowed customers longer to pay for their products, and kept the money out of Lucent's hands longer, creating serious cash flow problems. Two of Lucent's biggest competitors are Cisco Systems and Nortel Networks. At the end of 2000,"Nortel Networks increased its sales 34% and Cisco's sales grew 53%. That same study indicated that Lucent's sales fell 10%. When Lucent pre-announced in October, it stated that revenues from optical networking systems were down about 5%" (Weiss).

We see that while Lucent was losing money, their competitors were growing their business by large amounts, leaving Lucent further behind in their technology growth. Lucent did not seem to recognize how popular high-speed fiber optics would be for business and even personal use, and failed to grow with the market. When they did try to move ahead in the market, they made poor choices in the companies they chose to take over. "Lucent hasn't fared well in its forays into the acquisition market.

After originally announcing that it would not make any acquisitions in the optical space, Lucent paid $4.5 billion to acquire Chromatis. Even worse, Lucent was working to develop similar products prior to making this acquisition. That means money was wasted someplace" (Weiss). Some critics have accused Lucent of using reverse strategy, called "success built on failure." They will fall flat for a while, but ultimately rise from their own ashes and succeed.

However, management does not agree, and actually made their own position worse, when the CEO issued this statement: "I know they mention us, but we did not purposefully botch anything," said a clearly agitated Lucent CEO Harry Schacht. "Each and every one of our mistakes has been an honest-to-goodness blunder based on sincerely faulty business practices, not some intentional self-destructive strategy" (SatireWire). The ultimate downfall for Lucent has been poor management, matched with poor cash flow strategies.

Most of the top officers at Lucent have been replaced since the disastrous year of 2000, and Lucent has taken measures to solve their problems, and their 2002 second quarter financial statements do show some positive moves. They have cut staff by 47%, from a high of 106,000 employees, to 56,000 by the second quarter of 2002. Their revenues increased by 1.5%, while their cash flow increased by.2%. These are small margins, but their spending and accounts receivables also decreased, which shows the company is concerned about their financial problems, and trying.