Optical Illusions: Lucent and the Crash of Telecom

Author - Lisa Endlich ... [Goo?] [Posters]

This Hardcover Book item from Simon & Schuster was reviewed on 30-Jul-2008.

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1) Hardcover Book Optical Illusions: Lucent and the Crash of Telecom by Simon & Schuster. This subject is very complex and one needs to read the history of Western Electric and AT&T at divestiture to appreciate the detail that the author reveals. Bravo!¤

2) Hardcover Book Optical Illusions: Lucent and the Crash of Telecom by Simon & Schuster. Highly accurate (personally been there while it was happened) description of the unbridled greed and incompetence of Lucent management. An artifact well worth reading.¤

3) Hardcover Book Optical Illusions: Lucent and the Crash of Telecom by Simon & Schuster. Endlich chronicles the story of Lucent´s travels from AT&T spinoff in ´96 to nearly bankrupt skeleton in ´02. In two years its capitalization fell by $250 billion as a result of the stock dropping 99%. Despite having fabled Bell Labs as its research arm (developed transistor, laser, optical amplification, cellular transmilssion, UNIX computer operating system, C computer language, HDTV, and radar; "home" to 11 Nobel laureates), it also went from leader to laggard in a major new industry - optical switchgear.

Henry Schacht, former Cummins Engine CEO and AT&T Board member, was the first Lucent CEO. He requested Carly Fiorina the position of president of the Consumer Products division and a mandate to overhaul its product line. Instead, in a preview of her actions at H-P, she merged with the Dutch conglomerate Phillips, giving Lucent a 40% interest of the $2.5 billion (sales) and 12,500 employee result. Unfortunately, the new entity started out losing money and never improved. Lucent sold its share after two years.

At the time Lucent´s spin-off it was 1/4 the size of AT&T long-lines - 19 months later it was larger thanks to the booming economy and new capital investment - especially in the optical communications and new phone lines (as a result of Internet usage) area.

Early on Lucent decided to focus on new independent local carriers that were springing up across the country. Lucent´s new CEO (post Schacht) also broke the firm into 11 units - each with P&L responsibility. Thirty-eight companies were acquired in the first five years - each at a substantial premium. To help "pay" for the acquisitions Lucent resorted to increasingly aggressive accounting - eg. stretching the estimated value of its pension fund, etc. Then the demand for 2nd and 3rd phones started falling (initial demand became satiated; cable became a desirable alternative), and the new phone companies began encountering problems with maintaining growth and paying bills.

Lucent countered by increasingly funding equipment sales to increasingly credit-questionable firms, shifting sales from future periods forward, gaming the accounting for returns, etc. Meanwhile researchers became increasingly attracted to lucrative stock options offered elsewhere, and turnover amongst their ranks hit 20%.

Corrective efforts involved bringing Schacht back as CEO, a new CFO, reducing from 11 units to 4 (had duplicated sales and other staff between them). However, the "really bad news" was that an estimated 97% of new fiber laid was never "lit" - part of this was due to the fact that fiber laid pre-´95 with a capacity of 25,000 1-page e-mails/minute by ´02 could carry 25 million similar messages with little upgrading. Meanwhile Lucent´s customers learned how to "game" Lucent by waiting until late in the month to place orders (getting substantial discounts as Lucent struggled to meet its financial goals), and manufacturing became increasingly stressed by the see-saw nature of orders caused by this gaming.

Lucent had a high P/E ratio almost from the beginning due to its perception as a growth stock. However, this meant that once the growth stopped, the stock would get hammered. Even worse was the eventual revelation that fraudulent reporting had occured to support prior revenue-boosting efforts, the recognition that much of its accounts-receivable were uncollectable because of weak customers and poor quality shipments, and the substantial loss of market share due to Lucent´s not keeping up with new optical transmission technology.

2001 brought losses of $16.1 billion - more than Lucent had made cumulatively to-date; by 2002 75% of its employees were gone.

The one recommendation I have for the author is to have greater quantification of some of its problems - eg. how much was lost due to A/R write-offs, obsolete inventory, phoney sales, etc¤

4) Hardcover Book Optical Illusions: Lucent and the Crash of Telecom by Simon & Schuster. I enjoyed the comments of the preceding which told me much about the book in my conteplation of purchasing it. Lucent´s down fall started with the 1984 decree. Something that AT&T embraced thinking that new and bigger markets would be available. Missteps included buying TCI cable without the experience and knowledge of running a mom and pop business on the run far from "Bell Standards" that so many Western Electric and Lucent Managers embraced. They did not change into the flexible and savy business men of the 80s and 90s and lost at every turn and decission. The "Early Outs" prior to 1991 took most of the business knowledge and stability with them. Managers and CEOs were hired from all differnt kinds of Companies having differnt values and business understandings (which was needed) but lacked fundamental telecommunications expertise and how to gain a lion´s share of the market. The best method was new technologies coupled with listening to all the customers needs and concerns. Lucent, like its predecessor and parent company, devalued it´s stock and undevalued it´s once talented, dedicated and loyal workforce. The Book seems like a good purchase but it doesn´t seem to touch upon the employees who built it and subsequently were forced to see it go. Bell Labs and the Bell System literally dictated to the Baby Bells that analog equipment would continue to be used in the late 70s. Digital technology had been introduced by various venders and Bell Labs played "catch up" when the operating companies began buying the digital equipment fron non Western Electric sources. That was the first mis-step of Western Electric....Lucent Technologies management. Understand the marketplace and the needs of your customer...always. R. Ferry...27 years with Western Electric.¤

5) Hardcover Book Optical Illusions: Lucent and the Crash of Telecom by Simon & Schuster. I completely enjoyed this book. The factual accounting was wonderful and the book was an easy read.

We had some dealings with Lucent back when I was the founder of a telecommunication equipment startup and it was interesting to see the street view of the inner workings of the company.

The book goes through the history of Lucent from its spinout of AT&T through present day. The lessons associated with the management mis-steps are the most interesting part of the book. They made some fatal mistakes from the standpoint of technology investments (or not) and clearly jumped into the CLEC craze. They clearly made bad decisions about extending financee to customers that were not credit worthy; a general issue of the times. The WinStar story is particularly interesting.

The view of acquistions is very interesting. Very few panned out and the back of the envelope is that something like ten to twenty billion dollars of cash/equity went out the door to fund the acquisition ferver. The acquisition of Chromatis cost about $4.5B and they shut them down after 10 months. hmmmmm....

There are some terrific management lessons to be learned by reading this book. Much cheaper than owning the stock during the decline. :-)¤

6) Hardcover Book Optical Illusions: Lucent and the Crash of Telecom by Simon & Schuster. When Lucent Technologies was spun off from AT&T in 1996, the new company was full of promise. An old-line manufacturer, it quickly became a sizzling hot stock thanks to the emergence of the Internet and the build-up of telecommunications. The stock market was soaring, and Lucent flew with it. Within a few short years it became the sixth-largest corporation in America and the most widely held stock in the country. Yet only months later, Lucent was gasping for life, victim of the greatest stock-market bubble in history.

Optical Illusions is the story of a financially sound company steeped in world-class talent, dominant in one of the fastest-growing industries, that in the space of two years found itself downgraded to a junk-bond credit rating, under investigation by the SEC for its accounting practices, the value of its stock reduced to the price of a cup of coffee. Lisa Endlich tells the fascinating tale of the company that epitomized the misfortunes of the telecom industry, leaving investors and employees shocked and confused.

In writing this book Endlich had access to more than a hundred people who played a role in the drama, as well as previously sealed courtroom documents. She explains how the conflicting styles of CEOs Henry Schacht and Rich McGinn contributed to Lucent´s woes, and she shows how the loss of skilled executives such as Carly Fiorina hurt the company at a crucial moment. When it was all over, Schacht -- Lucent´s first CEO, who was later brought back to right the listing ship -- acknowledged that Lucent had allowed itself to be swept up in the market mania, distorting its corporate values in the process.

Although the stock-market mania of the late 1990s is remembered as "the Internet craze" or "the dot-com madness," as Optical Illusions shows, the damage was more widespread and lasting. In fighting for its survival, Lucent laid off more than 70 percent of its employees, wrecking retirees´ savings and investors´ portfolios alike.¤

Page Updated: Robert N. Goolsby, 27-Aug-2008, 07432266749780743226677, 700-120-740-570-840-350-8

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