Avaya, Lucent's enterprise networking division, has been spun off and distributed to current Lucent shareholders. The new company began regular trading today. Lucent investors can now learn more about the new company, and decide whether to keep their shares.
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Investors in Lucent Technologies (NYSE: LU) should have some new shares in their portfolios today. The company's enterprise networking group, which it decided to spin off last March, began regular trading this morning as Avaya (NYSE: AV). Lucent shareholders received one share of the new company for every 12 of their Lucent shares. As a result, Avaya has almost 5 million shareholders and is now one of the most widely held stocks in the U.S. In addition, Avaya will replace Owens-Corning (NYSE: OWC) in the S&P 500 Index. As a result of these initiatives, Avaya expects its new, combined markets to grow 11.6% annually through 2003. Certainly, that's better than 1.2%, but CRM solutions (which include call center and e-mail response software, for example) and other eBusiness services make up a small part of the company's business right now, and Avaya will face pressure to execute. Buy, hold, or sell? Of course, what to do with the shares is a decision that investors must make for themselves, and based on today's move -- as of mid-day, shares were down about $3, or 13% -- it seems that many current shareholders have made their decision.
Given that Lucent spun off the division because its growth was slowing, investors who either own shares or are simply curious about the company face an obvious question: Is there a reason to hold onto or buy the stock, if Lucent wasn't interested? That's a tough question. First, let's introduce the new company.
What does Avaya mean?
Avaya joins many other recent communications and technology companies with exotic-sounding, made-up names (such as Teligent, Agilent, and Verizon), thanks to what was probably a hefty payment to a name-consultant company. According to Avaya's website, "The name has a certain flair to it that says action, that says we're new, we're different." Whatever -- as long as it doesn't mean anything bad in Spanish.
What does Avaya do?
Avaya sells enterprise networking products and services, with "enterprise" simply referring to large corporations, government agencies, and other institutions. The company provides phone systems, customer call centers, and cabling equipment that connects phones, PCs, and local area networks. According a Securities and Exchange Commission filing, Avaya was the leading U.S. manufacturer of business phones in 1999, with 29% of the 15.9 million phone market.
Pro forma financial statements, which essentially estimate what past revenue and earnings would have been for the company had it been independent all along, peg Avaya's revenues at $8.27 billion last year, and earnings at $282 million. The company's enterprise voice systems business made up about 58% of sales, while maintenance services contributed about a quarter of revenue, and the company's connectivity business accounted for 16%.
The problem: slow growth
Avaya's main challenge is dealing with the anemic growth of its primary markets. The company estimates that the market for its enterprise voice products will expand at a compound rate of only 1.2% through 2003, and that the maintenance service market will only grow about 4.6% annually over the same period. The company's overall revenue growth, as Lucent discovered, is already slowing: Last year's $8.27 billion is only 6.6% above the previous year's sales, and for the first nine months of this year, pro forma sales are actually down 3.5% from last year.
A growth strategy
However, the company plans to target faster-growing markets. Avaya wants to use its established customer base -- it claims 78% of the Fortune 500 as customers -- to expand into hot-buzzword markets such as customer relationship management (CRM), unified messaging (which combines voice mail, e-mail, and faxes), and other "eBusiness" solutions.
At this point, it's difficult to come up with anything other than a wait-and-see verdict for the company. At least the company does seem to have better cash flow characteristics than its former parent. Avaya reduced accounts receivable this year, and recorded $213 million in free cash flow for the first nine months of 2000. Investors should certainly keep an eye on the company's balance sheet and cash flow statement going forward, since consistent cash flow is usually one selling point for a company in a mature business.
Your Turn:
Avaya shareholders are already discussing their new company on its discussion board.
Related Links:
Lucent vs. Cisco: Go With the Flow, Rule Maker Portfolio, August 7, 2000
Avaya's website
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