Sweet for Yurie... Sweeter for Lucent

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MARKET SHARE Bob Starzynski

Sweet for Yurie...
Sweeter for Lucent

If you haven't heard by now that 800-pound gorilla Lucent Technologies will buy young, hip Yurie Systems for $1 billion, you missed last week's hottest technology news.

Along with that news is the fact that Jeong Kim, Yurie's founder and chief executive, just became the richest man in Landover, Md. Net worth - in cold, hard cash - is $510 million for the 37-year-old entrepreneur. OK, so that might make him one of the richest people in the country, not just in Landover.

Anyway, an interesting codicil is being written into the deal between Murray Hill, N.J.-based Lucent and Yurie. Kim and three other top executives at Yurie must take part of their cash payment and buy Lucent stock. Why, then, didn't they save themselves some capital gains tax dollars and do a cash/stock deal instead of a cash deal with a reinvestment clause?

Let's take a step back for a moment. There are typically two ways one tech company can pay for another: cash or stock. The cash deal advantages are you have less regulatory hoops to jump through in completing the transaction, and you don't have to worry about the value of cash falling quite as drastically as stock prices. Cash deals can be completed faster because they are less complex than transfers of stock or dilution of stock by creating more of it.

But buying another company with stock has its advantages, too. Only a few huge companies have a rich enough balance sheet to afford to pay $1 billion in cash. Paying with stock is like buying an automobile with your Visa card: You can afford a lot more if you don't have to use greenbacks.

Plus - and this is the kicker - if you pay the acquirees with your company's stock, they will work a lot harder for you, trying to appreciate that stock value. They have a vested interest in your company.

Back to Lucent and Yurie.

Everyone is cheering Kim and his fellow executives for getting a great price for Yurie: $1 billion for a 6-year-old company that generated $51 million in revenue last year.

Sure, Kim and his colleagues deserve a lot of credit. They made a very valuable something out of nothing. But Lucent gets to have its cake and eat it, too. Lucent can close the deal quickly with a cash purchase and also get Yurie's vested interest with a reinvestment clause.

Asked for details on the reinvestment clause, Bill O'Shea, president of Lucent's Data Networking Systems group, would only say that it involved Kim and three other top managers. "We have a strong stock and a strong cash position," he said. "We wanted to get this [deal] done as quickly as possible."

He went on to say that the two companies only started talking less than one month before the deal was announced. The deal should close this month. Elapsed time: less than two months.

Both O'Shea and Kim declined to comment on how much money the Yurie executives would have to invest in Lucent. Kim only said: "It shows we are on the same side."

However, there are a couple of drawbacks to this deal from Yurie's perspective.

Most importantly is the tax issue. If paid in stock, Kim and his fellow executives would not owe any taxes until they sold that stock. But with cash, they owe the capital gains taxes this year, not to mention future capital gains on their new Lucent stock investment.

Also, if you have to buy a stock, you usually want to do so when it is undervalued. Not that Lucent's stock price will never appreciate from its May 1 close of $75.06. But the stock is trading at an all-time high, having shot up more than 80 percent in the past four months alone. Just this week, Barron's labeled Lucent as one of the most overpriced stocks on the market.

At least one analyst, Philip Sirlin of Schroder & Co. in New York, has downgraded his rating on Lucent from "buy" to "hold."

Granted, Kim and his cohorts are sitting on mounds of cash but taxes and investment stipulations will take a big bite.

For questions, comments and suggestions, contact Bob Starzynski on the Internet at bobs@pnbi.com.


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