A "Must" Deal for Lucent

The phrase "disruptive technology" is thrown around often -- to the point where it is nearly meaningless. But there is one buzzword that seems to have substance: VoIP, or voice over Internet protocol.

Simply put, VoIP allows for much more cost-effective phone calls using the Net. Already, upstarts like Vonage have demonstrated that there is tremendous demand for VoIP solutions.

But, to carry out the VoIP build-out, there is a need for cutting-edge telecom equipment. That's an opportunity for players like Lucent (NYSE: LU  ) , Nortel (NYSE: NT  ) , Sonus (Nasdaq: SONSE  ) , Alcatel (NYSE: ALA  ) , and Cisco (Nasdaq: CSCO  ) . The addressable market for these companies is expected to increase from $1.3 billion in 2003 to more than $14 billion by 2008.

Yesterday, Lucent jumped into the VoIP race by purchasing privately heldTelica for about $295 million in stock and options. It was a hefty premium, as Telica is estimated to have revenues of $30 million to $40 million this year.

Then again, Telica has a best-in-class product line that is experiencing surging demand. There are over 50 customers so far, with perhaps the most key being Verizon (NYSE: VZ  ) .

Lucent's deal has a good-news/bad-news quality to it. First, the bad news: It's clear that Lucent lacks core technology and is playing catch-up. The good news: The company is confident enough in its current financial situation to do deals (it was not long ago that there were legitimate concerns that the company would go bust).

Also, don't expect fireworks from the deal. It is expected to dilute earnings by $0.01 to $0.02 a share in fiscal 2005, although it may add to earnings in 2006. If anything, the deal shows that Lucent probably saved itself from being left out of the VoIP party.

Did Lucent overpay for Telica? Will it gain an edge in the race to deploy VoIP? Share your thoughts on our Lucent discussion board.

Fool contributorTom Taulliis the author of The EDGAR Online Guide to Decoding Financial Statements. He does not own shares in any of the stocks mentioned.


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