The Decline of Lucent

Adapted from chapter one of Optical Illusions by Lisa Endlich. The comments in brackets are my own.

No industry looked more promising [in 1996] or bled more money [in 2000-2002] than telecommunications. With a collapse in market capitalization of more than $4 trillion [yes, that's Trillion with a capital T] and job losses in excess of 500,000, the telecom meltdown ranks as the greatest stock market debacle ever.

[This is something that's often lost as the dot-com bust has somehow dominated headlines related to the 2000-2002 stock market collapse. The dot-com losses in terms of both the companies' bottom lines and the stock market wealth wiped out are the merest drop in the bucket compared to the telecom collapse.]

Lucent was born in April 1996 as a spin-off of the foundering telecom giant AT&T. It was the largest initial public offering ever, and because each AT&T shareholder became a Lucent shareholder (along with the new investors attracted by Lucent's stellar performance), it was not long before Lucent was the most widely held stock in America. Lucent was born at the inception of the greatest market bubble ever, at the outset of an investment boom that poured billions of dollars into the telecommunications industry. Lucent's startling transformation from an obscure division of AT&T to the sixth-largest corporation in America and then to a company gasping for its financial life left investors and observers by turns delighted, shocked, confused, and finally dismayed as they sought an explanation for the company's descent. The speed of Lucent's decline was as staggering as its magnitude. In the space of twenty-four months, the market capitalization of the company dropped by a quarter of a trillion dollars as its stock price plummeted by 99 percent. Lucent went from spending $100 million to advertise its new name to turning off lights and shuttering bathrooms to save pennies. [emphasis mine]

This is the story of a financially sound company steeped in world-class talent, dominant in one of the world's fastest-growing industries, that in the space of two painful years found itself branded with a junk-bond credit rating, under investigation by the SEC for its fraudulent accounting practices, fighting off rumors of insolvency, and, hat in hand, begging its bankers for a little more time. But the story is surprisingly dramatic for a telecom equipment vendor, complete with a boardroom coup, a stock rise and fall in the shape of Mount Everest, and a series of financial and product decisions that left the company enfeebled.

Lucent's leaders were the men and women of AT&T, the people who practically invented the modern corporate structure. As an old-world stalwart turned new-world bellwether, Lucent experienced the fallout from this historic event with as much force as any ethereal dot-com. When it was over, CEO Henry Schacht was forced to admit that the frenzy that engulfed the stock markets had badly distorted the company's value structure, tampered with its moral compass, and led to decisions that would never have been made in saner times. [Right, Henry, it's the market's fault.]