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VTech Buys Lucent Consumer Division

The long-awaited sale of Lucent’s Consumer Products Division has finally been made, with VTech Holding Co. of Hong Kong making the purchase.

As part of the deal VTech has also negotiated exclusive rights to the AT&T brand for wireline telephones and accessories in the U.S. and Canada for 10 years.

According to the agreement an-nounced last Wednesday, VTech will pay $113.3 million to purchase assets that include consumer research and development operations in New Jersey, associated intellectual property, and manufacturing and repair facilities in Mexico.

The deal calls for VTech to pay AT&T royalties based on net sales for the brand. That is expected to amount to about 4% of net sales, according to VTech chairman Allan Wong, ranging from $10 million in 2000 up to $21 million in 2009. VTech also has the right to renew the brand license for another five years.

Under the agreement, the approximately 4,500 Lucent Consumer Products employees located in Eatontown, Parsippany and Murray Hill, N.J., and another 200 in manufacturing and repair locations in Guadalajara and Reynosa, Mexico, will transfer to VTech.

VTech plans to continue to market VTech-brand phones as well as the AT&T line, using separate sales and service operations, to address different markets. “The brands will be run separately to a great extent,” said VTech managing director Paul Murphy, “with separate sales organizations selling to the retail channels. Externally it will look like two different operations, while internally we will leverage our core operations.”

He added that the AT&T brand will continue to be operated out of New Jersey, although the offices in Murray Hill and Parsippany will be consolidated.

“The acquisition substantially strengthens our position as a global leader in consumer communications by increasing our presence in the U.S., where we sold about 8 million 900MHz cordless phones in our 1998-1999 fiscal year,” said Wong. “The transaction immediately doubles the size of our telecommunication products business, which generated U.S. $555.3 million in sales in the fiscal-year 1998-1999.”

He added that the acquisition allows VTech to increase its target of sales of $1.8 billion in 2003 to $2.5 billion for that year.

VTech currently operates five companies in three cities, including VTech Communications of Beaverton, Ore., which markets the VTech-brand telephones.

VTech is no stranger to AT&T and Lucent, having supplied it with cordless phones for many years. “Lucent has for many years been one of our most important customers, and we already enjoy a close working relationship with Lucent people,” Wong said.

The acquisition marks the latest turn in the Consumer Products Group’s recent turbulent history. In 1997, Lucent Consumer Products joined forces with Philips to form a worldwide joint venture that was subsequently dissolved a year later in the fall of 1998. Since that time the Lucent Consumer Products Group has been for sale, and the wireless portion of the group was split off and sold to Motorola.

The Philips/Lucent effort had included not only the wireless group but also the leased phone business, which is also being sold separately, bringing the total number of employees at that time closer to 6,000.

VTech is faced with turning around a company that has recently posted significant losses of $115 million in 1998 and $37 million in the first 10 months of 1999, according to Wong. However, Murphy pointed out that the 1998 losses came during the time of the Philips/Lucent joint venture when the company included cellular as well as consumer wireline phones.

VTech executives have expressed optimism about turning the company around by leveraging the AT&T brand, which commands a premium price and is a leading brand, especially in the U.S., and through its ability to lower costs and manage the company more efficiently.

At the same time, Wong expects to expand the company’s telephone offerings. “VTech has concentrated almost exclusively on cordless phones,” he said. “This allows us to expand our line into feature phones, including corded phones, as well as products such as Internet phones and wireless Internet browsers.”

While Lucent has wanted to divest itself of the Consumer Products Division for some time because it is not its core business, Murphy said, VTech sees the agreement as an opportunity “because consumer phones is our core business.”

“This is quite a major development. It is very exciting,” said market analyst Peter Arato of NPD Intelect. “This will make VTech an even stronger market leader in cordless, with two very strong brand names, and it will also help them to address two price tiers in the market.”