Pulling Lucent back from the brink

It's probably hard for most people to imagine misplacing nearly US$700 million, but that's just what Lucent Technologies Inc. did, and now the U.S. Securities and Exchange Commission is investigating the company's accounting practices. And that's only one of the problems facing Lucent and its relatively new CFO, Deborah Hopkins.

Hopkins came to Lucent from Boeing Co. (BA) , where she was credited with much of that company's solid financial performance (which since has slipped). Since she joined Lucent in March, the company has had little good news and the company's financials have been miserable. Lucent's board pushed out CEO Rich McGinn, and about 10,000 employees are following him out the door as part of the layoffs that were announced in conjunction with the company's latest earnings call.

Given those grim circumstances, what Hopkins needs to do is clean house. She can do little to curb Lucent's lagging technology - that's up to the people in Bell Labs, the company's research and development arm. But she can re-engineer the way the company sells its wares.

Lucent's real problem is that it must compete fiercely to sell its exorbitantly priced equipment to just a few telecom companies that are spending billions on new communication networks. To land these huge deals, large equipment makers have resorted to essentially paying their customers to buy their products.

The news Friday that the SEC is looking into Lucent's US$679 million in adjusted revenues for the fourth quarter of fiscal 2000 is really not news. The company announced apparent troubles in November, and as Hopkins and interim CEO Henry Schacht began to try to get control over the company's flagging fortunes, they launched an internal investigation into possible accounting irregularities. Lucent released the results of that investigation to the SEC in December.

Lucent admitted in its most recent earnings call that it deducted $199 million in credits extended to customers - $28 million for the shipment of equipment - that had not yet been received by the company.

Most recently, Lucent loaned US$1.6 billion to Telefonica SA at favorable interest rates for its third-generation wireless network in Germany. The gear is actually worth only $800 million, meaning that Lucent is loaning Telefonica $800 million. In theory, Lucent makes out in the long run by having Telefonica build its future on Lucent technology, but Telefonica will have to pay the money back some day.

"Lucent is financing in a crazy way," says Rick Gilbert, CEO of Copper Mountain Networks Inc., a Lucent competitor. "If a company asks for financing, all we can do is send them to GE Capital or someone like that. Lucent can do it themselves, and on terms no one else would dream of giving away."

The proliferation of that type of vendor financing is raising eyebrows, with many questioning whether it might wind up hobbling the equipment industry. Lucent is expected to amass a total of $9.1 billion in debt from financing deals, including the $1.6 billion for Telefonica. Lucent and Cisco Systems Inc. had a scare late last year when a couple of partners went into bankruptcy protection or out of business entirely.

Hopkins told Wall Street in a recent conference call that she hopes to do fewer financing deals, focusing only on large ones such as Telefonica. This means that there will be more Lucent sweetheart deals and that the resulting debt from vendor financing will climb above $10 billion, putting more strain on the financially troubled company.

Lucent is far and away the most aggressive financier of the telecom giants. Nortel Networks Corp. expects to carry about $2 billion in debt by the end of the year, but has publicly turned down financing deals for a few heavyweight customers, most notably AT&T Corp.

Hopkins and Lucent are making some strides toward getting the company's runaway vendor financing under control, but for Lucent to bounce back entirely, the company will have to come out of the SEC's investigation cleanly, as well as convince investors that it has changed its ways.

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