A change at the top

Tyco buys Lucent's leading power systems division Tyco International's $2.5 billion purchase of Lucent Power Systems means there is a new name heading the list of telecom power suppliers, but the change may be minimal for carrier customers.

With 4700 employees and about $1.2 billion in revenue last year, Mesquite, Texas-based LPS is considered the leading supplier of uninterruptible power supply systems for the telecom industry. After announcing in May its plans to sell the division, Lucent Technologies was flooded with offers during the past five months before choosing the all-cash package from Tyco, a newcomer to the industry.

"The acquisition of LPS moves us into a market characterized by a very attractive growth, excellent margin opportunities for us and a high level of fragmentation," said L. Dennis Koz-lowski, chairman and CEO of Tyco.

While noting the fragmentation within the power supply industry - the top five competitors combined account for less than 26% of the market - Kozlowski acknowledged the possibility of consolidation with other power supply companies.

Many observers expected the LPS sale to mark the first major consolidation within the market because longtime competitors such as Emerson Electric and Invensys were among the bidders. The fact that an industry outsider emerged the winner means carriers will continue to have the same number of power supply options, said John M. Celentano, president of Skyline Marketing Group.

"If it had been bought by [an existing power supply firm], there would have been a shift in the balance of power; this way, it maintains some balance," Celentano said. "I think it makes for a pretty healthy, competitive environment... that's good for the customer."

And the future benefits of choice will not be limited to LPS' customers. While it is the leader in the power supply industry, being associated with the Lucent name often made it difficult for the company to expand its customer base, said Barry Papermaster, LPS' vice president of sales and marketing.

"A Lucent [networking] competitor is not going to want to put a Lucent product next to their large switch in a central office," Papermaster said.

Celentano agreed that being able to pursue contracts with customers such as Nortel Networks and Alcatel should prove to be a boon to Lucent.

"The fact that Tyco won the business, as opposed to Emerson or Invensys, allows Lucent to run as a real power company.... Now they can serve anyone," Celentano said.

In addition, the power supply business should benefit from being out of the financial shadow cast by its Lucent parent, which resulted in the departure of CEO Richard McGinn last month - a circumstance that may have made Tyco's all-cash offer especially enticing to Lucent, Celentano said.

Now the power company will be part of the electronics group of Tyco, a conglomerate that has increased its revenue from $4.5 billion to almost $29 billion - and its market share from $1.5 billion to $80 billion - during the last five years, Papermaster said. "With that kind of a parent, we can only be better," he said.

For Tyco, buying LPS offers strategic benefits as the electronic conglomerate makes a transition from being a components-only supplier to a systems provider. Indeed, Tyco bought TyCom from AT&T - Lucent's ancestral parent - three years ago and foresees a similar transition for LPS into the company, Kozlowski said.

"The acquisition of LPS is an excellent fit for Tyco," Kozlowski said in a prepared statement. "It provides a link between Tyco Electronics' electronic components and TyCom's communications networks. A considerable amount of Tyco Electronics' components are used in power systems, and this acquisition will allow us to further leverage our product capabilities."

Kozlowski identified $385 million in synergy that will be realized by the integration of LPS into Tyco. The purchase should add 5› to Tyco's earnings in the first year, 12› in the second year and 15› in the third year.

Of the synergies outlined, head count reduction accounted for $70 million in savings. However, Kozlowski said he would not detail how those savings would be realized until the completion of the sale, which he expects to close by the end of the year.

Celentano said he would not be surprised if Tyco decided to sell the OEM power supplies portion of LPS, which he believes could attract a $1 billion price. That would allow Tyco to recoup some of the money spent buying LPS while still retaining the market leader in telecom power.

"By buying Lucent, they have bought a position in the market where it didn't have one before," Celentano said. "They essentially bought the leading company in the world - Lucent is clearly the No. 1 vendor in that space."