Product Description

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.

Product Details

• Amazon Sales Rank: #860999 in Books
• Published on: 2004-09-28
• Original language: English
• Number of items: 1
• Binding: Hardcover
• 320 pages

From Publishers Weekly
By all accounts, Lucent should not have succeeded when it split off from AT&T in 1995. The "dreary equipment business" was saddled with several unprofitable operations, and most of the executive leadership would rather have been someplace else. They didn't even like the name or the new logo. Yet in a few years, the telecommunications company was not just the sixth-largest corporation in America but the world's most widely held stock—and then just as quickly, it was reduced to barely one-hundreth of its peak value. What happened? Endlich (Goldman, Sachs: The Culture of Success) is careful to distinguish Lucent's collapse from the illegal activities that took place at Enron, Tyco and other companies in the late 1990s, explaining that the firm's accounting tactics were "legal and defensible but inadvisable." She also demonstrates that the warning signs were visible early, from an excessive growth in receivables to a series of risky loans to other telecom companies. She focuses almost exclusively on Lucent's internal drama, documenting the company's failure to live up to the reputation for innovation set by Bell Labs and the unresolved tensions among top brass that compounded early financial difficulties. Though lacking in juicy scandal, this straightforward account holds its own against other recent tales of corporate downfall.
Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved.

From Booklist
In 1996, because of deregulation in the telecommunications industry, AT&T trivested itself and spun off Lucent Technologies, a portion of Bell Laboratories that was loosely defined as its equipment-manufacturing division. The investment community embraced Lucent because it was a high-tech company that actually had tangible products and had its roots in one of the biggest blue chip companies of all time. Rising star Carly Fiorina, presently CEO of Hewlett-Packard, made her public debut as the coordinator of Lucent's IPO and sold it over big, while secretly everyone involved was concerned about the enigmatic name and logo. But this darling of the industry rode the high-tech boom and bust with the rest of them, and by 2002 its stock chart resembled Mount Everest. Endlich's story reveals that conditions inside the company were never too rosy, and as it struggled to compete as a high-tech behemoth with old-tech values it lost 70 percent of its employees and 99 percent of its stock value. Sector watchers will enjoy Endlich's insightful view into the conflicts and leadership styles at this industry giant. David Siegfried
Copyright © American Library Association. All rights reserved

Excerpt. © Reprinted by permission. All rights reserved.
Chapter One: Looking Back

The underpinnings of the emerging telecom bubble were a phenomenal miscalculation. At the time it seemed like a logical progression of history: cellular, the Internet, the new thing. It was bold, it was risky, it was expensive. And it was wrong.

David Barden

telecommunications analyst, Bank of America

The stock market bubble of the late 1990s will undoubtedly be remembered as the "Internet craze" or "dot-com mania," but this would be selling the madness short. While the fortunes of individual dot-coms have provided journalists and financial historians with some of the most dramatic, colorful, and apocryphal tales, they form only a peripheral portion of a much larger and more significant tale. No industry looked more promising or bled more money than telecommunications. With a collapse in market capitalization of more than $4 trillion and job losses in excess of 500,000 between 1999 and 2002, the telecom meltdown ranks as the greatest stock market debacle ever.

Lucent embodied the transformation in telecommunications. Born in April 1996 as a spin-off of the foundering telecom giant AT&T, Lucent had once been part of the largest regulated monopoly in the United States and thus was protected from the vagaries of the marketplace.

Lucent was the largest initial public offering ever, and because each AT&T shareholder became a Lucent shareholder (along with the new investors attracted by Lucent's stellar performance), it was not long before Lucent was the most widely held stock in America.

Market booms and busts have been studied over time from a macro perspective, with the observer stepping back to examine their insidious effects on the economy as a whole. Perhaps some light can be shed on the boom and bust at the turn of the century by adopting a micro point of view, by studying the path that leads to madness through the actions of a single company that in every way embodied its times. Lucent was born at the inception of the greatest market bubble ever, at the outset of an investment boom that poured billions of dollars into the telecommunications industry. And while understanding this mania in investment is essential to comprehending the company, the reverse may be true as well.

Lucent's startling transformation from an obscure division of AT&T to the sixth-largest corporation in America and then to a company gasping for its financial life left investors and observers by turns delighted, shocked, confused, and finally dismayed as they sought an explanation for the company's descent. The speed of Lucent's decline was as staggering as its magnitude. In the space of twenty-four months, the market capitalization of the company dropped by a quarter of a trillion dollars as its stock price plummeted by 99 percent. Lucent went from spending $100 million to advertise its new name to turning off lights and shuttering bathrooms to save pennies. This is the story of a financially sound company steeped in world-class talent, dominant in one of the world's fastest-growing industries, that in the space of two painful years found itself branded with a junk-bond credit rating, under investigation by the SEC for its fraudulent accounting practices, fighting off rumors of insolvency, and, hat in hand, begging its bankers for a little more time.

Situated on the seam where the new economy met the old, Lucent's prominence alone might have made its downfall a moderately interesting tale. But the story is surprisingly dramatic for a telecom equipment vendor, complete with a boardroom coup, a stock rise and fall in the shape of Mount Everest, and a series of financial and product decisions that left the company enfeebled. This is not a tale that can be charted over decades by pointing to a corporate culture decaying from within or a market in, say, buggy whips or bonnets disappearing in its entirety. Nor is it the story of teenagers popping out of a garage with an invention that would earn them billions, yet finding themselves unable to run the company they built. Lucent's leaders were the men and women of AT&T, the people who practically invented the modern corporate structure. As an old-world stalwart turned new-world bellwether, Lucent experienced the fallout from this historic event with as much force as any ethereal dot-com. When it was over, CEO Henry Schacht was forced to admit that the frenzy that engulfed the stock markets had badly distorted the company's value structure, tampered with its moral compass, and led to decisions that would never have been made in saner times.

The moment of inflection for Lucent came when the U.S. government passed the Telecommunications Act of 1996, igniting competition and forever shattering the rigid confines of this cozy, quasi-monopolistic industry. For Lucent, this regulatory change was a godsend. While Lucent remained inside AT&T, its customers had been AT&T itself and the local Bell phone companies. Soon hundreds of upstart telecom carriers were in a race to build their own state-of-the-art networks, relying almost entirely on borrowed funds. A spending free-for-all broke out, and as the world's largest purveyor of telecommunications equipment, Lucent could not have been better situated to take advantage of this investment binge.

Henry Schacht is known for his business wisdom, and in his earliest days as CEO, he accurately foretold the difficulties that would plague his company and its industry in this unsettled environment: "The pace of change is escalating dramatically at a time when visibility and predictability are declining dramatically." Management would need to pick up the pace, and for those coming from AT&T "the future is getting more opaque. My analogy is that it is the equivalent of a racecar driver accelerating in an increasingly dense fog. This is not a description that human beings find very comforting. We instinctively shy away from rapid destabilizing change; an element of fear is introduced." Even he would be surprised at the prescience of his predictions.

Copyright © 2004 by Lisa Endlich

Customer Reviews

More "Crash of Lucent" than of telecom
The title tells it all, this book is more about the crash of Lucent than the telecom industry as a whole though understanding the fall of one of the largest enablers of that speculative period will illuminate what should have been the obvious weakness of rest of the industry. Probably the ultimate book surrounding the whole speculative bubble surrounding the drab telecommunications industry's day in the sun may never be written, so this book will on the rise and fall of Lucent and their place in it may well be it. If it is, it is well researched and decently explains a vital but little understood business. The author's observations on the key players and their relationships to each other are well placed especially where Carly Fiorina is concerned. There is no doubt that she was probably their most capable manager but not even she would have been able to dig them out of the hole created by Lucent's inexperienced CEO, Rich McGinn, dug them into; her exit to Hewlett-Packard couldn't have been better timed.

Lucent's major failures are documented here with balance and fairness. About the right amount of ink is used in explaining the techno-babble surrounding the importance of the market for the OC192 optical switch, enough so the layman can understand it and complex enough so a telecom engineer won't get too bored. She also notes with great accuracy Lucent's inability to integrate acquired businesses and align their strategies with their own, a weakness inherited from parent AT&T. These and other failings ultimately tell a business horror story of what happens when companies ignore their core values and steadily growing a business but instead take direction instead from the stock analysts whose only concern was "meeting the whisper numbers" and quick profits. In addition to their private financing of nearly insolvent customers, the author probably could have gone a little further into the other messy misdeeds that were uncovered as Lucent's stock fell, such as the private golf course that Lucent was revealed to be building at the tine of the collapse. Perhaps their envelope pushing accounting tactics were not as extreme as Enron or Tyco but she well documents how their financial tactics jumped back and forth across that bright ethical line. Probably the only real flaw in the book is this failure to apply perspective to the excessive influence industry stock analysts exercised on the telecom industry during the period 1995 through 2002. For example she accepts the unanimous praise within the industry analyst community for the Agere spinoff as the hidden jewel within Lucent while stressing also how badly it needed to dump its Business Communications System unit now known as Avaya. There is a missed opportunity to note that this historically denigrated business unit which spent its much of its life within Lucent, and before than in AT&T, as the scapegoat and ugliest poster child of the "unsexy" telecom equipment business, is today one of the few businesses successfully challenging and succeeding against Cisco which is what Lucent aspired to be but never succeeded at. There is also a missed opportunity to examine the outsized and corrupting influence these analysts had on American business as a whole during that time, but that is another story...

Lucent/Bell Labs: "Round the decay Of that colossal wreck.."
With apologies to Percy Bysshe Shelley, the near-collapse of this icon of American industry and innovation sorely needs to be explained.

Overall this is a good if conventional business-analysis book. As with most such books, its focus is on the strengths and weaknesses of the personalities in top management (and to a lesser extent, their relationship with the company's board of directors, and the financial industry and press).

In the author's opinion, Lucent might have survived in spite of its weaknesses had there not been a crash in the overall market for telecommunications equipment. The author's explanation for that crash is a story of overinvestment and market saturation- there simply wasn't (in the short run, at least) anywhere near enough end-user demand for all the capacity that the network operators were buying.

While I agree with this analysis, a weakness of this book is the author's lack of explanation as to how the leaders of this industry could have failed to realize that a market in which the cost of equipment purchases by service providers was growing far more rapidly than service providers' own revenues had to be unsustainable, and must come to an abrupt end.

Something that will annoy some readers is the author's use of, and failure to fully explain, industry acronyms and jargon (for example, explaining that "ATM" means "asynchronous transfer mode" doesn't exactly tell you what it means, should you not already know). There could also have been more explanation of the effect of the 1996 Telecom Act, particularly as it favored those new local-exchange competitors who chose to lease existing network elements from the Bell Operating Companies over those that invested in and build their own parallel/alternative networks.

Overall this book presents a strong narrative, is well written, concise, and generally avoids the platitude-blather that infects all too many business books. It could, however, have done a better job of explaining just how the industry could have jammed the accelerator to the floor, apparently oblivious of the cliff waiting just around the bend.

Managed into the Ground
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