Lucent's Microelectronics Group to go it alone

Sept. 1, 2000



With a glance over its shoulder at the ever-expanding JDS Uniphase, Lucent Technologies (Murray Hill, NJ) announced plans to spin out its Micro electronics and Communications Technology Group (Allentown, PA) in hopes of both leveraging the value of its optical-components and semiconductor assets as well as sharpening its focus on the provision of equipment for optical networking, data communications, and wireless infrastructure. The new company, which had yet to receive a name at press time, will enter a world in which size definitely seems to matter.

Lucent plans an initial public offering (IPO) of up to 20% of the new company by the end of the first quarter of next year. The components company should be on its feet by the summer of 2001. John Dickson, executive vice president and CEO of the current microelectronics operation, will lead the formation of the new entity.

Dickson believes the new company will be an immediate factor in the communications components market. "We have a unique position because this will be the only company with leadership in both optoelectronic components and integrated circuits," he said in a conference call with reporters. "With the accelerating transition from electrical to optical, this is a tremendous competitive advantage."

The new entity will need an advantage as it faces off against JDS Uniphase. Dickson predicts his firm will be on a par with its chief rival when the spinoff is completed. "There are aspects of our product portfolio that they don't have that they're looking to acquire to strengthen themselves, and there are aspects of their portfolio that we don't have. But I think if you look at the total opportunity, we probably both have very substantial coverage," he claimed.

Approximately 3,250 engineers currently working at Bell Labs will form the heart of the engineering team charged with increasing that coverage. In total, the new company will employ more than 16,000 people in 105 locations worldwide. The group has achieved $4 billion in revenue over the last four quarters, with $1 billion of that coming from opto electronic components. That end of the business grew 80% last year, and Dickson predicted similar or greater growth in the next 12 months.

Expected increases in sales and the war chest created by the IPO will enable the company to leverage the work of its engineers with acquisitions of other companies and technologies. "I think there's a very significant strategy and requirement now, with the speed of our customers in terms of development requirements and evolution, that requires us not only to just develop our internal capability but to acquire and place technologies alongside. We have been doing that over the last two to three years and would expect to use this new currency as a new opportunity to enhance that," Dickson predicted.

Lucent's recent acquisition of Hermann Technologies, a supplier of DWDM components, hints at the direction such acquisitions may take, Dickson revealed. "Essentially, this organization has been very strong in the active area over its history so far, and clearly as optoelectronics moves more and more into subsystem capability, we'll need to strengthen our passive capability," he explained. "So that will be a significant focus as we go forward."

The creation of the new company alleviates what Dickson termed "strategic conflicts" between the group's efforts to sell components to system houses around the world and the fact that it carried the name of one of its clients' major competitors. Dickson said that 75% of the group's sales currently come from outside of Lucent; customers include such well-known names as Nortel Networks, Alcatel, Cisco Systems, Ciena, and Siemens. He expects current customer and supplier relationships will remain unchanged.

Of course, that statement doesn't take into account the group's relationship with its biggest client, Lucent. While having a components supplier in house would seem to ensure a steady supply

of optical building blocks for Lucent's systems business, Dickson said that there had been no special agreement with Lucent's systems arm to give them first rights to new technology or manufacturing capacity-nor would one be created now. That said, Dickson attempted to allay potential fears that Lucent would be forced to look for a replacement component supplier.

"I don't think it makes any difference," Dickson said of the effect the spinoff will have on the group's relationship with its former parent. "Lucent is now my number one customer; it's the largest customer of micro electronics. It will stay that way, I think, at least for the foreseeable future."

To make Dickson's expectation reality, Lucent will have to make good use of its newfound specialization in networking equipment. Lucent announced the spinoff during its third-quarter earnings report, in which chairman and CEO Richard McGinn lowered the company's revenue expectations for the next two quarters. In a press statement, the company blamed "product transition issues associated with a faster-than-expected decline in circuit-switching sales" as well as "a longer-than-expected, full-volume ramp-up in optical networking," among other reasons, for the gloomier expectations. Earlier this year, the company had missed an earnings milestone by underestimating the demand for OC-192 (10-Gbit/sec) equipment.

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