This deal may make sense

Last week’s suggestion by Wall Street investment firm UBS Warburg that Lucent exit the ATM/frame relay switch business by selling it to Cisco may be too good for either company to pass up.

Last week’s suggestion by Wall Street investment firm UBS Warburg that Lucent exit the ATM/frame relay switch business by selling it to Cisco may be too good for either company to pass up.

Lucent would get a quick infusion of sorely needed cash – somewhere on the order of $500 million to $650 million, Warburg estimates – and exit a noncore business at a time when it needs to restructure in light of declining revenue and mounting losses.

For Cisco, the deal would vault it into a market leadership position with coveted regional Bell operating company and incumbent local exchange carrier (ILEC) accounts where Cisco’s penetration has been challenged most. Lucent is the leading supplier of ATM/frame relay switches to the U.S. RBOCs, Warburg notes, with the No. 1 position at Verizon, SBC, BellSouth and WorldCom.

Cisco is attempting to reestablish relations with the operational personnel of these carriers after acknowledging that it has not been customer driven in its dealings with RBOCs in the recent past. Warburg says RBOC customers have typically viewed Cisco as “too arrogant” in the past few years.

Cisco could also sweeten the deal for Lucent by enabling the beleaguered telecom giant to continue to service and support ATM/frame accounts sold to Cisco. Lucent is putting a bigger focus on generating revenue from professional services going into 2003 in an attempt to return to profitability.

Lucent could also tap Cisco as an exclusive supplier of IP routers to RBOCs and ILECs as part of the hypothetical deal, Warburg states. Lucent does not have a router product line today, but it is developing the TMX 880, an IP/MPLS switch for the core of multiservice networks.

Warburg holds out little hope that the TMX 880 will succeed, however. Lucent lacks IP expertise, and RBOCs are likely to keep their ATM and IP networks separate for the next couple of years as they continue to generate revenue from ATM installments while gradually phasing in IP cores.

The IP aspect of the proposed deal would also allow Cisco to better succeed in the U.S. RBOC market against Juniper as well as to tap Lucent’s installed base of CDMA wireless networks for IP routers as these networks migrate to 3G data services in the future, Warburg states.