Who is the world leader in sales of communications semiconductors? According to Lucent, it is the company they are about to spin-off, Agere Systems. On a pro-forma basis Agere notched $4.7 billion in sales in 2000, and while this company may be only a few weeks old, it already employs 16,500 people worldwide. Agere is one of the few companies in the world to combine top-notch optoelectronics and IC manufacturing. Around 25% of sales in 2000 were derived from optoelectronics. This equates to around $1.2 billion, which makes Agere one of the top three manufacturers in this area, rivaling Nortel and JDS Uniphase. The company grew its sales 27% last year, driven by the optoelectronics segment, which posted an 82% increase in sales. More than 75% of sales last year were to companies other than Lucent. All of Agere s IC fabs are dedicated to silicon, but they do purchase GaAs parts from Vitesse and TriQuint, among others. See . Lucent is proposing to sell roughly 20% of Agere to the public in an IPO in March. Jim Jungjohann, who follows the photonics sector for CIBC World Markets, has done a "back of the envelope" calculation that values Agere at $50.3 billion. His formula is based on the assumption that the opto unit grows 50% and the IC business grows 15% next year, producing total revenue of $6.3 billion. Looking at Agere s "peer group" in the stock market, he says it could be assumed that the opto business should be valued at around 18 times 2001 revenue, while the IC group should be valued at 6 times 2001 revenue. However, Jungjohann thinks that some adjustments are needed, to account for an increased debt burden and lower profitability due to higher R&D expenditures stemming from loss of access to Bell Labs. He is also factoring in a 15% "IPO discount" to reach a final valuation of around eight times forecasted 2001 revenue. Interestingly, this figure represents 75% of Lucent s current market valuation of about $65 billion. Jungjohann believes that Lucent will receive as much as $10 billion in the offering, making it one of the largest IPOs ever. He believes that the new company is likely to be one of the top players in the optoelectronics marketplace. In addition to Lucent, Agere s other top customers include Nortel and Cisco. Their top ten customers accounted for 52% of revenues in 2000. Lucent has given Agere a three year purchase agreement obligating it to purchase at least $1 billion worth of components from Agere annually. Jungjohann predicts that Lucent s preeminent position on Agere s customer list will diminish after the IPO, when Agere will have a better opportunity to improve relationships with Lucent s rivals. Agere s management have indicated that they will focus their efforts on the three areas of their business that have the best growth prospectsnamely, optical components, ICs for network communications, and wireless local area networking products. The company predicts a compound annual growth rate from 1999 to 2003 in these three areas of 36.6%, 26.0% and 31.4%, respectively Agere s opto portfolio is primarily made up of active components, including lasers, modulators, amplifiers, and transceivers. The company recently added more passive components, such as filters and silicon waveguides. The majority of Agere s products in the high-speed long-haul transport area operate at 2.5 or 10 gigabits per second. The company says it has 40 gigabits per second modulators and receivers being sampled by customers. In addition to the long-haul market, Agere is also offering optoelectronic components for the submarine, metropolitan, cable television (CATV), and data communication markets. A list of products offered for the different applications is shown in the Table. The remaining 75% of Agere s business is ICs for communications and computing. In the communications area, Agere is producing ICs for both the wireless and fiber optic communications. When Lucent was spun off from AT&T in 1996, one of the things it took with it was the prestigious Bell Laboratories. As part of this latest spin-off, 275 research engineers will be transferred to Agere. They will join 2,800 other development engineers and scientists, also previously part of Bell Laboratories, who are already part of Agere. An as-yet undisclosed intellectual property portfolio is also being transferred from Bell Laboratories to the new company. Nevertheless, Agere will need to increase its R&D investment in order to make up for the loss of total access to Bell Labs. On a pro-forma basis, Agere s R&D expenditures were $827 million in 2000, up 21% over the previous year and up more than 75% since 1998. The company is projecting R&D expenditures of $1.2 billion in 2001. Commenting on the prospects for Agere, Jungjohann noted that they lag their key competitor JDS Uniphase somewhat in product depth and breadth, particularly in passive optical components. However, he said, "we believe the company has an important competitive offering in its early move to marry its ICs with optoelectronics. The company s first product from this union, transponders, appear to successfully position Agere in the attractive subsystem market." He says this market is seeing "robust growth" as Nortel, Lucent and other system companies outsource an ever greater percentage of this type of equipment. John Young, the former CEO of Hewlett-Packard, will be Chairman of Agere, and John Dickson, CEO of Lucent Microelectronics, will be the President and CEO of the newly independent company. Dan DiLeo will change from President of Lucent Microelectronics to head of the Agere Optoelectronics Group, and Sohail Khan will continue on as the head of the IC group. See .