Lucent Technologies (NYSE:LU) had no choice but to buy its way into the voice over Internet protocol (VoIP) technology market space. The purchase of VoIP softswitch specialist Telica fills a gaping hole in the struggling telecom equipment vendor's technology portfolio. But it also flags questions about the value of R&D at Lucent.
While the $295 million deal in stock and options isn't huge by telecom standards, the "need" to acquire Telica's technology should raise Lucent investors' eyebrows. Why, given all the money that Lucent has thrown at R&D in recent years, should Lucent have to get key technology from outside?
Publicly, Lucent calls itself an R&D-focused technology company. When you think of technology R&D, it's hard not to think of Lucent. After all, this is the company that houses Bell Laboratories, where researchers invented things like the transistor and won six Nobel Prizes. Since 1999, Lucent has thrown nearly $15 billion at R&D. Down from previous years, R&D spending in 2004 will represent a kingly 17% of Lucent's estimated $8.9 billion revenue.
But the Telica deal could be a signal that Lucent's R&D is becoming obsolete. Unable to come up with the VoIP goods organically, Lucent has had to solve the problem through acquisition -- financial engineering rather than real engineering.
The trouble is, it's tempting these days for big technology companies like Lucent to tweak existing products rather than build the kinds of breakthrough technologies that keep growth on track. At the same time, these companies are often reluctant to create new products while the cash cows produce predictable revenues. Remember, the bulk of Lucent's revenues come from traditional telecom voice systems.
The burgeoning market for VoIP products hasn't come as a bolt from the blue. Resisting pressure from analysts to make deeper cuts in R&D, two years ago Nortel Networks (NYSE:NT) saw the VoIP opportunity and opted to invest heavily in the technology. Cisco Systems (NASDAQ:CSCO) has also built up a strong position in the technology over the last few years.
Lucent is now focusing its R&D on the hot growth area of wideband code division multiple access (W-CDMA) wireless handset technology. Will shifting into this technology mean more execution risk than Lucent R&D can handle? Investors should keep a close eye on that R&D spending and hope that Lucent gets it right.
What's your opinion on the state of Lucent's R&D? Share your thoughts on the Lucent discussion board.
Fool contributor Ben McClure hails from the Great White North. Ben doesn't own any shares mentioned here.
