Micro machine: Lucent rumored to be spinning off component business

The buzz about Lucent Technologies potentially spinning off its microelectronics and optoelectronics division won't subside, even though the company declines to talk about it. Valued between $50 billion and $100 billion, the division is one of Lucent's most successful.

Lucent has confirmed it will spin off its enterprise business division and sell its power group in an effort to refocus on its fastest-growing operations, including wireless and Internet equipment.

But Lucent would not comment on the spinoff rumors regarding the component division.

"They are just rumors," a Lucent spokesman said. "We are always looking at how we can increase shareholder value."

While the company's service provider systems organization has seen better days in terms of meeting projected quarterly earnings, the component division grew 80% last year - and the company expects to sustain that growth down the road, the spokesman said.

However, the 80% growth rate is not limited to Lucent. It is consistent with the growth rate in optical components throughout the industry for 1999, said Jay Liebowitz, director of optical components for RHK.

"It sounds crazy to say that 80% is the average," he said. "We all need to be in a market like that."

The driver behind the high growth rate is a demand for capacity and, in turn, the components used to build high-capacity, dense wave division multiplexing (DWDM) systems. Such demand has created a shortage in components throughout the industry. To counteract the shortage and take advantage of profits, Nortel Networks and Lucent acquired component makers, folding them into their existing component divisions.

Last week, Lucent purchased Herrmann Technologies for $438 million in stock, adding thin film process technology to its portfolio of products. Used to make passive optical filters, thin film process technology is a building block in DWDM systems. The filters clear the signal by minimizing unwanted wavelengths on multichannel fibers.

Spinning off the microelectronics division and taking the new company public could help Lucent generate cash to further invest in the division and keep pace with competitors Nortel and JDS Uniphase, said Chris Nicoll, director of optical infrastructure for Current Analysis.

"I think it's a good idea," he said. "The division within Lucent is very well-managed and well-established in the marketplace."

Currently, Lucent's microeletronics group supplies only 25% of its products to the company's systems group. Seventy-five percent of the group's business is delivered to the external merchant market, the spokesman said.

Yet taking the division's success into consideration, spinning off could hinder Lucent, Liebowitz said. "I'm not sure how much better they'll do on their own."

In May, Nortel created its High Performance Optical Components Solutions business unit to consolidate its optical components businesses, including newly acquired CoreTek and Photonic Technologies.

Because Lucent's component division is so successful, spinning it off could give the impression that its systems group is not as valuable, Liebowitz said.

While Lucent's systems group has experienced a slowdown, the company has been testing a lot of new equipment during the last six to nine months, which should reach the market soon, Nicoll said. Equipment sales should increase again in the fourth quarter of this year and first quarter of next year, he said.