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Lucent Technologies
Warren Buffet on the Move

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By labelman
July 9, 2002

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Several weeks ago I posted a message that stated that LU could be ripe for a play by Warren Buffet. Many on this board dismissed this as highly unlikely. Today WSJ has an article stating that Berkshire Hathaway (Warren Buffet) and others are making a $500 million dollar investment in Level 3 communications with the intent to buy up troubled companies for a song and consolidate them into a money making venture.

I also pointed out that one of the new LU board members has ties to Buffett. The bottom line is that Warren Buffet is now in the telecom business and that has consequences for LU.

While I don't see him buying LU, I can see him making an equity investment in LU under the right terms. If you recall, Avaya took in new equity from existing partners not too long ago.

I think this announcement in the WSJ is the reason Lu's stock price is up today. In order for the telecom market to bottom out and start growing again, an industry consolidation must occur that will soak-up and warehouse excess capacity so that telecom service prices can rise or at least stop falling. It's not going to be much longer before the telecom industry stops selling services at a loss to gain market share. They can no longer hide their operating losses with accounting magic.

WorldCom, Quest, and many others didn't try to make money selling telecom services. They tried to make money by manipulating the price of their shares and by booking phony profits from acquisitions and capacity swaps. Sooner or later these telecom companies will have to start generating cash from operations. As a result, many will go insolvent because their operating income simply can't support their debt levels.

I think Buffet's strategy is very simply and nothing more than economics 101. For the telecom industry to recover excess capacity has to be taken off the market. With current prices so depressed for telecom assets, some one with cash can come in and buy up this excess capacity at cents on the dollar and take this capacity off the market. As capacity starts to drop prices will start to stabilize.

The fact that Buffet is making a move in telecom is a good sign. the only way Lucent can make is if their customers start making money again on operations and have dealt with their debt one way or another. Also excess capacity has to be taken out of the system in order for LU and NT to have sales opportunities.

As someone pointed out, the economics that drive the telecom industry are much the same as those that drive the utility companies. IN the future, LU's stock will perform more like Duke Power than Cisco's. The telecom equipment market is cyclical and driven by the price the service providers can get for their services.


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