Lucent Government Plays Team Card

Lucent Government Plays Team Card

James O'Neill

By Bob Starzynski, Staff Writer

Lucent Technologies' Government Solutions division started the new fiscal year Oct. 1 with a plan: redirect its business to focus more contracting efforts on partnering.

Half of Lucent's government business is through direct, prime contracts. The rest is through teaming or partnering arrangements, where Lucent provides subcontracted products and services for other primes, like Computer Sciences Corp., Electronic Data Systems, Science Applications International Corp. and Raytheon.

By next October, James O'Neill, president of Washington-based Government Solutions, wants the scales to shift so that 80 percent of his unit's business comes from teaming and 20 percent is from prime contracts. O'Neill's division, which has 1,400 employees and an additional 3,000 service consultants, does not report revenue from its government business.

What is known is that Lucent is growing its overall revenue base by about 20 percent per year, to an estimated $30 billion for fiscal year 1998. Meanwhile, the government division is growing its General Services Administration schedule sales 50 percent a year.

"I think Jim O'Neill is introducing his products wherever they will fit," said Tom Hewitt, president of Federal Sources Inc., a market research firm in McLean, Va.

Subcontracting is not O'Neill's only focus in working with other companies. Since he took over the telecommunications equipment giant's government division in January 1997, he has signed distributor agreements with 50 companies. Two years ago, his unit had no distributors or resellers: Lucent people sold Lucent products.

"I get three calls a day from presidents of companies wanting to team with us," O'Neill said in an interview. "It really makes sense for us."

Lucent, based in Murray Hill, N.J., was spun off from AT&T two years ago. It owns Bell Labs, a telecommunications engineering operation that churns out an average of three patents every day.

The company makes phones, switches, servers, microchips and fiber optic cable.

And, lucky for O'Neill, Lucent is the only U.S. company that offers many of the voice technologies in its repertoire. Its closest competitors in that market are foreign companies, such as Nortel, Alcatel, Ericsson and Siemens.

"We win an unfair share of what we bid on in the U.S. government market,' O'Neill said. He estimated that his division wins 60 to 70 percent of the prime contracts it goes after.

Two of its largest prime contracts were won a year ago: A systems modernization program with the Army that Lucent is sharing with 18 other contractors is potentially worth $1 billion; a project called ViViD to supply the Navy with networks, equipment and telecom services, which Lucent is splitting is GTE, is worth $2.9 billion.

But with the government focusing its contracting on broader-scoped projects, Lucent's products and services only fill a portion of the pie.

"We don't want to bid 20 direct contracts and win 10,' O'Neill said. "We want to bid five and win three or four.'

So the company has been doing an increasing amount of subcontracting work. In July, it was awarded part of the GSA's Seat Management contract under prime contractor SAIC. That contract, worth a massive $9 billion, is split among eight primes and numerous subs.

"It is getting more important for contractors to partner now,' Hewitt said. "Government executives are encouraged to buy from the GSA schedule. If they can't, it is because they need a full solution. Full solutions are best handled by teams [of contractors].'

But the company, whose largest government customer is the Navy, is not a shoe-in for every contract it goes after in the government arena.

On Sept. 25, NASA crowned Lockheed Martin Corp. of Bethesda, Md., winner of a $3.4 billion contract to operate and streamline the organization's mission control and data delivery operations.

Lucent was on a competing team headed by Boeing Co. of Seattle. That piece of business could have made Lucent $100 million or more.

Losing that contract bid "will have very little impact on our business,' O'Neill said through a spokeswoman after NASA's announcement. "We had not started ramping up for it yet."

Two years after stepping out from under AT&T's wing, Lucent is the center of much acquisition speculation lately. It can now use the pooling-of-interests method of accounting for acquisitions, enabling the company to buy another business without having to write off goodwill costs. Goodwill, the difference between the value of a company's tangible assets and the price paid for that company, dilutes the value of the purchaser's stock when written off.

On Oct. 6, Lucent announced that it bought Quadritek Systems Inc. of Malvern, Pa., for $50 million in cash. Quadritek was a privately held company that makes next-generation Internet protocol software.

Analysts and pundits have put several larger companies high on Lucent's wish list, including Ascend Communications, 3Com and Newbridge Networks.

Although O'Neill would not comment on any prospective acquisitions in the works, he said Lucent "will acquire some more in the next three or four months." Earlier this year, the company bought Yurie Systems, a switch maker in Landover, Md., for $1 billion in cash.

One company that appears to have an interesting complement of technologies to Lucent's products is Cisco Systems of San Jose, Calif.

The two companies compete on many contracts to offer data router technology to customers. And Cisco is currently valued quite high ? its stock trades at eight times sales, despite having fallen 30 percent in the last two weeks.

But fundamentally, Lucent "is a voice company trying to buy data companies, while Cisco is a data company trying to move into voice," O'Neill said.

"Our market sectors are very complementary," said Jim Massa, director of federal operations for Cisco. "We partner with Lucent, and I expect that will continue."

According to Lucent officials, the two companies have not teamed on a specific contract yet. But, the officials added, Lucent has sold Cisco products through its ViViD contract with the Navy.

O'Neill and Massa would not comment on the probability of a union between the two companies. However, O'Neill said: "Candidly, we have talked to them about possibly teaming on some contracts."

While the two companies work together in many ways in the federal market, Massa believes that as Lucent acquires its own data technologies, the relationship may wane.

"To be a full solution provider, Lucent needs more data technology," he said. "But if they get that technology [elsewhere], there may be less of a need for us to team."

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