Lucent to Gobble Up INS (News) August 10, 1999

Lucent to Gobble Up INS

By Brian Graney (TMF Panic)
August 10, 1999

Continuing to use its high-flying stock as a currency non pareil, Lucent Technologies (NYSE: LU) was back at the acquisition game again today. This time, the telecommunications equipment giant has agreed to exchange $3.7 billion of its stock for network services consultant International Network Services (Nasdaq: INSS). The deal, which will be accounted for as a pooling of interests and is expected to have no effect on Lucent's fiscal 2000 earnings, sent INS' shares shooting higher this morning.

INS will be folded into Lucent's NetCare business, which provides network services and support to more than 10,000 enterprise and service provider clients. The emphasis is clearly on the fast-growing service provider area, tapping into the opportunities that are developing as carriers in the U.S. and abroad rapidly build-out their packet based networks of the future. This is currently the fastest growing part of INS' business, which saw revenues jump 162% year-over-year in the fiscal Q4 to $40.5 million.

NetCare already offers its service provider clients help with network planning, implementation and integration, operations, and support and maintenance. INS will supplement those existing services while also adding a layer of expertise working with multiple vendors in such areas as TCP/IP, frame relay, ATM, routing, and switching, which had previously been outside of Lucent's core competencies.

Speed is a key element in the changing communications marketplace, and INS should considerably bolster Lucent's time-to-service capabilities. Also, INS should help Lucent package its array of packet-based products from recent acquisitions such as Ascend and Nexabit Networks into a suite of products that can then be offered to network services clients. This is just one example of how Lucent sees one aspect of its business driving revenues in other parts of its business, propelling the company closer to its goal of providing one-stop shopping for networking equipment and services.

INS' business is growing and could provide a nice profit boost for Lucent down the road. Revenues at the firm have increased at a 14% compounded sequential rate over the last seven quarters, while operating expenses have been rising at a slightly lower 13% compounded sequential rate. Consequently, operating margins have widened to 16.7% in the most recent quarter from 14.3% in the fiscal second quarter of 1998. Those figures compare favorably to Lucent's overall operating margin of 14.6% reported in its fiscal third quarter.

Coming on the heels of yesterday's announcement by Cisco Systems (Nasdaq: CSCO) that it would invest $1 billion in consulting firm KPMG's telecom and enterprise services unit, it appears that Cisco and Lucent are looking at similar networking roadmaps. In fact, according to INS' 1998 proxy statement, Cisco owned a 7.8% stake in INS, suggesting the data networking firm may have had first crack at buying the company outright but balked in order to set up its strategic partnership with KPMG. It will be interesting to see which network services strategy -- complete integration versus strategic partnership -- yields the greater return on investment in the long run.

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