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Agere Systems Inc. designs and manufactures integrated circuits, which are made using semiconductor wafers imprinted with a network of electronic components. Integrated circuits perform several functions such as processing and storing data, controlling electronic system functions, and processing electronic signals. Agere ranks as the market leader in providing integrated circuits for the hard disk drive market, conducting its manufacturing activity in Orlando, Florida, and overseas, where the company owns facilities in Singapore and Thailand. The company divides its business according to the markets it serves, operating a client systems group and an infrastructure systems group. Through its client systems group, Agere caters to the computing and consumer communications market, marketing integrated circuits, software, and reference designs for various applications. Through its infrastructure systems group, the company serves the networking equipment market, selling integrated circuit solutions to network equipment customers. Agere's client systems group accounts for more than 70 percent of the company's total annual revenues. Roughly 80 percent of Agere's annual revenues are derived from sales outside the United States.
Agere was a spinoff of a spinoff, a company whose corporate roots were entwined in telecommunications giant AT&T Corp. In 1996, AT&T formed a separate company and sold it to the investing public, spinning off Lucent Technologies Inc. From its birth, Lucent towered as a leading designer, developer, and manufacturer of telecommunications systems and software products, employing more than 100,000 workers. Agere's future leader, John T. Dickson, made the move to Lucent following its spinoff, vacating his post as vice-president of AT&T's integrated circuit business unit--a position he had held for the previous three years--to become chief operating officer of Lucent's microelectronics group. In 1999, Dickson was named executive vice-president and chief executive officer of the microelectronics group, putting him in position to spearhead Agere's operations once it was freed from Lucent.
Agere was formed as a wholly owned subsidiary of Lucent on August 1, 2000. The former microelectronics group drew its name from an acquisition completed in the spring of 2000, when Lucent acquired a small microelectronics company based in Texas named Agere. Using some of the assets gained through the purchase of the Texas-based company, Lucent created a new company, a new Agere, whose business comprised communications semiconductors, including optoelectronics components and integrated circuits, which were considered to be the basic building blocks of electronic and photonic products and systems. Upon its formation, Agere had annual revenues of $4.7 billion, 16,500 employees, and facilities scattered throughout 22 countries. Dickson was named president and chief executive officer of the new company.
Lucent formed Agere for the express purpose of divorcing itself from its microelectronics business. The company announced its intention to spin off its microelectronics group in July 2000, one month before Agere was officially formed. By creating an operationally separate company, Lucent hoped Agere could have easier access to capital from investors and forge better relations with its customers, some of whom were direct competitors with Lucent, such as Cisco Systems and Nortel Networks.
The process of separating Agere from Lucent took longer than anticipated. On February 1, 2001, Lucent transferred its microelectronics assets and liabilities to Agere, but the initial public offering (IPO) of its stock was delayed. Agere filed for its IPO in December 2000, but market conditions were not favorable for the company's IPO. In early February 2001, the offering price range was set between $15 and $20 per share in anticipation of selling 370 million shares. With the economy in a recession and the technology sector in collapse, Lucent was forced to lower its offering price and reduce its stake in Agere two weeks later, when the price range was narrowed to between $16 and $19 per share and the number of shares offered raised to 500 million. Less than a week later, the price range was trimmed again, reduced to between $12 and $14 per share. By the end of March 2001, the offering price had been lowered to between $6 and $7 per share before being set at $6 per share. Agere's IPO was completed on April 2, 2001, when Lucent sold 600 million shares, raising $3.6 billion.
Independence in 2002
Agere's debut on the New York Stock Exchange did not translate to its independence from Lucent. The IPO, according to the March 18, 2002 issue of EBN, "was supposed to herald [Agere's] freedom and ability to explore strategic business opportunities outside the Lucent group." The IPO, however, did not signal Agere's liberation from Lucent. Lucent retained a 58 percent interest in Agere following the IPO, making Agere a majority-owned subsidiary of Lucent. Lucent intended to complete the spinoff of Agere within months after the IPO, but its own financial problems delayed the separation. To free Agere, Lucent needed to post positive earnings for the fiscal quarter preceding the spinoff, something the troubled telecommunications and software company was having difficulty achieving. Lucent hoped to distribute Agere stock to its shareholders in September 2001, but the company pushed back the spinoff to negotiate new agreements with lenders after it realized it would incur as much as $9 billion in restructuring charges resulting from trimming its workforce by 49,000 employees. The distribution of Agere shares was rescheduled for March 2002, a target date that promised to pass without the spin off being completed after Lucent announced in October 2001 a greater than expected loss for its fiscal fourth quarter. The distribution of Agere stock to Lucent shareholders occurred, after several delays, on June 1, 2002, 14 months after the IPO.
While the process of separation dragged on, Agere contended with numerous difficulties. Following its IPO, Agere was saddled with $2.5 billion of bank debt, a burdensome inheritance from Lucent. The company also saw its primary markets weakened by anemic economic conditions, as its customers either went out of business or significantly reduced their expenditures. Consequently, the sale of Agere's optical and electronic components for communications networks and computing dropped alarmingly, making the company's first year after its IPO a trying period. Agere was forced to change its operating strategy to compensate for the decline in its core business, a move that gave the company a significantly altered profile.
Faced with mounting losses and waning sales, Dickson was forced to lay off employees, consolidate facilities, and sell assets. The divestitures raised much needed cash and reshaped the company's composition, giving it a new strategic focus. In December 2001, Agere sold its field-programmable gate arrays (FPGA) business to Lattice Semiconductor Corp., raising $250 million in cash. In June 2002, when the cord connecting Agere and Lucent was finally cut, Dickson sold the company's wireless LAN equipment business to Proxim Corp., gaining $65 million from the sale. The following month, Legerity Inc. agreed to pay $70 million to acquire Agere's analog linecard integrated circuit business. In August 2002, the company announced it intended to exit the optoelectronics business, one of its two principal businesses--the other being its integrated circuits business--in 2001. Agere's optoelectronics business, which comprised components that carried data and voice traffic over optical networks, generated approximately $1 billion in revenues.
The decision to exit the optoelectronics business coincided with the announcement of Agere's strategic focus for the future. The company announced it would concentrate on providing advanced integrated circuit solutions that accessed, moved, and stored network information. In an August 23, 2002 interview with Fiber Optics Weekly Update, Dickson explained, "We are redefining Agere as a premier provider of integrated circuit solutions to target the communications and computing opportunities that present the best long-term potential." The change in perspective was dramatic. In 2001, roughly 70 percent of Agere's business was derived from the sale of infrastructure products--equipment that companies and telecommunication carriers used to carry voice and Internet traffic. When the sales of such products slowed, the company shifted to what it referred to as the "client" side of its business, focusing on chips used for disk drives, personal computer connectivity, wireless local-area networks, and cellular handsets. By the end of the three-month period ended in December 2002, Agere derived 69 percent of its revenue from the sale of client-side products, with the sales of storage chips accounting for one-third of the company's total sales.
By the spring of 2003, the sweeping restructuring efforts had created a smaller and refocused Agere. Manufacturing facilities had either been sold or consolidated, as the bulk of the company's production activity moved overseas. The divestitures, which shed businesses such as analog line cards, FPGA, wireless networking equipment, cable television components, and optoelectronics, stripped the company of more than half its annual revenue. Further, the sale and consolidation of facilities and businesses had drastically reduced the company's payroll, cutting Agere's workforce by approximately 60 percent. In its new guise, the company hoped to arrest its alarming pattern of losses, which totaled more than $6 billion since its IPO. In an April 1, 2003 interview with Electronic Business, Dickson remarked, "The two-year period after the IPO was very rough. It's been a bad period for the entire industry, but we've learned a lot in the process, and we're bringing a new Agere out of that, poised to prosper."
Rebuilding in 2003
Set for its new course, Agere began to rebuild, taking steps to augment rather than reduce its operations for the first time in its existence. In September 2003, Agere announced it had acquired Massana Ltd., the first acquisition completed by the company since its IPO. The acquisition, valued at approximately $26 million, formed the basis of Agere's new Ethernet division. In November 2003, the company reported its first quarterly profit since gaining independence from Lucent, posting $11 million in net income, a celebratory occasion considering the company lost $885 million during the same quarter a year earlier.
As Agere plotted its future course, the company appeared to have put to rest questions regarding its financial viability. Its future success depended largely on the accomplishments achieved in its client systems group, which accounted for an increasing percentage of its revenue. In 2002, 65 percent of Agere's revenue was derived from its client systems group. In 2003, the client systems group generated 72 percent of the company's revenue. In the years ahead, Agere hoped to produce sustained profitability, a goal whose achievement depended on the company's ability to maintain its market leadership.
Principal Subsidiaries: Ortel Corp.
Principal Operating Units: Client Systems Group; Infrastructure Group.
Principal Competitors: Broadcom Corporation; Infineon Technologies AG.; Texas Instruments Incorporated.
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