The New Jersey Star-Ledger - November 13, 2004

Lucent's legacy

David Jones lives in the shade of the Holmdel Tower, a three-legged water vessel that was designed in 1961 to resemble an early transistor.

For Jones, this is a monumental irony. The invention of the transistor was a triumph for Bell Labs, where Jones worked as a member of the technical staff for 35 years, first under AT&T and later its spinoff Lucent Technologies. Now, the gigantic edifice that guards the gates to one of Lucent's largest research and manufacturing plants is a daily reminder of the devastating job losses the telecom equipment maker has suffered.

For those who made their careers at Lucent, the company's downfall was a triple blow. They lost their jobs, their savings and investments, and now many are losing some of their retirement benefits as well. While some former employees speak of Lucent with anger, Jones looks out his window at the 472-acre Holmdel campus with a feeling of sadness.

"There is an overwhelming feeling of loss," he says. "I look at the building across the street and know that compared to 1999 it is practically empty, and it is hard to come to grips with that. At one time the building was so crowded that they set up offices in the atriums, conference rooms, dining room and even the basement. I am still in a state of shock, about what was and will never be again."

Today Lucent, based in Murray Hill, is enjoying its first profitable year since 2000. This is welcome news for the company's 32,300 employees and anyone who was nimble enough to buy its stock while it was below $3. But for hundreds of thousands of former employees and shareholders, the pain of the past four years will not subside with a single year's meager profits.

Ultimately, Lucent's story is a cautionary tale, underscoring the painful human costs of corporate miscalculations. As such, it holds important lessons for American companies and their employees and investors in a era of rapidly advancing technology.

 

LOOKING BACK

The stock market bubble of the late 1990s will undoubtedly be remembered as the "Internet craze" or "dot-com mania," but this would be selling the madness short. While the fortunes of individual dot-coms have provided journalists and financial historians with some dramatic, colorful and even apocryphal tales, they form only a peripheral portion of a much larger and more significant drama.

 

No industry looked more promising or bled more money than telecommunications. With a collapse in market capitalization of more than $4 trillion and job losses in excess of 500,000 between 1999 and 2002, this industry ranks as one of the greatest stock market casualties of all time.

Lucent was owned by the little guy. In the late 1990s, nearly 5.3 million of the 49 million American stockholders owned Lucent, making it the most widely owned stock in the country. These were the mom-and-pop investors who had tucked AT&T into their retirement accounts when it was still a regulated monopoly, hoping to retire on its bounty. But as the value of the stock plummeted by 99 percent, these dreams and savings were lost.

Like many Lucent loyalists, Jones did not sell his stock. The company had granted him options, and like so many of his colleagues he bought more stock through payroll buying programs. "We believed in ourselves, we believed in the company, and we believed it would all turn around," Jones recalls.

New Jersey watched Lucent's startling transformation from an obscure division of AT&T to the sixth-largest corporation in America and then on to a company gasping for its financial life. This reversal of fortune left investors and observers by turns delighted, shocked, confused and finally dismayed.

The speed of Lucent's decline was as stunning as its severity. In the space of 24 months, the market capitalization of Lucent dropped by nearly a quarter of a trillion dollars, from $258 billion to $10 billion. Lucent went from spending $100 million to advertise its new name to turning off lights and shuttering bathrooms to save pennies.

In just two painful years, a financially sound company steeped in world-class talent and dominant in one of the world's fastest growing industries found itself branded with junk-bond credit rating, under investigation by the SEC for its accounting practices, fighting off rumors of insolvency and, hat in hand, begging its bankers for a little more time.

The reasons for the telecom implosion -- and with it, Lucent's fall -- are many: a deregulated industry gone mad, an investment binge that swamped the industry and capacity that was expanded far beyond what could productively be utilized.

Capital investment in the industry grew by 26 percent per year in the late 1990s while revenues only rose by 10.5 percent. As investment in telecom exploded, thousands of small, financially unstable carriers emerged into a highly competitive environment in which they eventually failed.

Banks and telecom equipment suppliers lent money to these start- up companies and watched in horror as they headed for Chapter 11. For its part, Lucent bought 38 companies in less than four years and struggled with the insurmountable task of integrating their cultures and products.

Scientific advances also allowed existing technology to be used more productively. This led to a situation of gross overcapacity; industry analysts estimated that 97 percent of all the fiber-optic cable laid was never "lit," or activated.

In their all-out quest for growth, Lucent failed to keep up with the fast-changing marketplace and fell behind competitors like Nortel in cutting-edge optical products. In the first half of 2000, Nortel's optical sales grew by 34 percent, while Lucent's fell by 10 percent. Later, Lucent's then-CEO Rich McGinn was forced to admit, "They (Nortel) have gotten billions of dollars of business from a technology that we thought would be a niche business."

As Deborah Hopkins, Lucent's former chief financial officer, would note after her company's fall, "Being driven by growth, growth, growth and maybe a little profitability after it, doesn't yield the best results."

But for years investors did not seem to mind, or even notice. As the stock market took flight, many people abandoned common sense, succumbing to the dangers of believing that "this time is different."

 

AND NOW

Two weeks ago, Lucent was able to report its first profit in four years. This must be put into perspective. Lucent made $1.15 billion over the last year, but it has lost $29 billion in the last three years. As CEO Pat Russo pointed out, the reported profit was a cause for only muted celebration.

 

For the company's retirees up and down New Jersey, few parties broke out. In fact, a battle has broken out between the current and former management of Lucent and those they once employed.

Lucent is in a strange and financially uncomfortable spot. The crash of telecom has left the company a shadow of its former self and the net result is four retirees for every active employee. The fallout from this unfortunate ratio is an increasing difficulty in maintaining the benefits promised to these former workers by contracts and agreements negotiated in more prosperous times.

For Lucent, the issue is a matter of cash. As former CEO Henry Schacht told Ken Raschke, head of the Lucent Retirees Organization, "Despite everyone wishing it were different, the facts remain. At its reduced size, Lucent cannot afford to continue to subsidize retiree health costs at the current level and remain competitive."

Schacht points out, correctly, that Lucent is not the only company in this position -- but this is little solace for families with health care bills to pay.

For retirees, the picture is decidedly different. Lucent has reneged on its promises and slashed health care and other post-employment benefits. For many, this means draining savings that were already decimated by Lucent's stock plunge.

Benefits have continued to be cut in stages over the past two years. Management retirees have borne the brunt of those changes so far, but union workers last week tentatively agreed to pay more out- of-pocket health care costs as part of a new contract. Some Lucent retirees have organized and last week asked the Securities and Exchange Commission to investigate Lucent's pension plan.

Although Lucent has shuttered plants all over America, the doors at the Holmdel plant remain open. For David Jones and thousands of his former colleagues, there is painful symbolism in that: Even when things look up, even when companies hardest hit by the crash begin to revive, the very real pain of lost jobs, reduced tax revenues, contracting benefit packages and a decimated stock price linger for many years.

Lisa Endlich is the author of "Op tical Illusions: Lucent and the Crash of Telecom."