price had tumbled to an anemic $15.50 from a high of $82

a share in December 1999, and Lucent's revenues were

shriveling up amid a technology sector implosion. That

was part of the allure

a company in distress and rebuilding its once impressive

credentials. But she didn't know how ugly things truly

had become, especially on the finance side, until she

agreed to prepare a report for her new boss, CEO Henry

Schacht, only days after she had arrived at the

headquarters of the erstwhile telecommunications darling

in Murray Hill, N.J. I realized the task was going to be

bigger than I anticipated, she recalls now. The picture

she painted for Schacht was of a finance department that

had been totally marginalized by a sales and marketing

team intent on selling even if a deal was unprofitable

for Lucent. Warnings about the creditworthiness of

customers went unheeded in the pursuit of revenues. The

solution to doing business with those without the proper

wherewithal: extend enough Lucent-backed financing to

seal the deal and keep revenues growing at the

double-digit rates that Wall Street liked. As a result,

the four-year-old spin-off from AT&T Corp. was

burning through its cash at an alarming rate<$2.2

billion in the 2001 fiscal first quarter ending Dec. 31,

2000, alone.

Restive

Creditors

But there was more: No

one at Lucent had been talking to its creditors as its

fortunes slid. And by this point in the Lucent saga, the

banks were panicking, not to mention hopping mad. It was

not a very desirable situation for a company facing a

liquidity crunch that, in a matter of weeks, would force

it on hands and knees to these same financial

institutions. It

was hardly the scenario Hund-Mejean, 41, expected to

find when she joined Lucent after 10 years at General

Motors Corp., where she last served as an assistant

treasurer. Not that then-Chief Financial Officer Deborah

Hopkins wasn't honest when she offered Hund-Mejean the

job. Hopkins said things were bad, and I was leery,

admits Hund-Mejean. What Hopkins didn't spell

out

liquidity problem.

That cash crisis would

essentially preoccupy Hund-Mejean for the next nine

months. But by reviving credit facilities and banking

relationships, she ultimately created a foundation upon

which to rebuild Lucent's financial health and its

credibility on Wall Street. The work Martina Hund-Mejean

and that treasury department have done is enough in my

mind to indicate that Lucent is now financially stable,

says Steven D. Levy, a technology analyst at Lehman

Brothers, who had long been critical of Lucent as it

unraveled. They've stemmed the tide of irresponsible

vendor financing and are putting in some financial

discipline that could ensure profitable revenues.

Frank D'Amelio,

Lucent's current CFO, says that while the company has

made progress, he is not prepared to say that the work

is done. We've had a cash flow improvement, our EPS

has improved, our vendor-financing portfolio has gotten

smaller and our headcount has gone down, says D'Amelio.

But we are still losing money and generating negative

cash flow. We know there is still a lot more work to be

done. Where we are is not sufficient. D'Amelio, 43,

became Lucent's CFO in May after Hopkins, with only

about a year on the job, was pushed out just as many of

the steps she had taken to restructure the company's

finances were producing returns.

The key to Lucent's

success to date

at $6.30 a share on Dec. 17, falls far short of anything

resembling a reversal of fortunes

making the finance department an integral part of the

entire corporate structure. Going far beyond just

putting a cap on the company's storied vendor

financing, which had ballooned to more than $8 billion

by the time Hund-Mejean joined Lucent, the task meant

overhauling the system to ensure sales would be working

in lockstep with finance. The finance staff at Lucent

was not fully integrated into the business, and their

roles were not laid out clearly, Hund-Mejean says. We

had to get out of the black-box syndrome and educate

people about cash and why it was important. Once it was

explained, people were on board.

Indeed, the Lucent story

has become less a lesson on innovation and more about

the importance of imposing some common sense on a

company that in many ways operated without it. And in

that respect, it may prove to be a cautionary tale for

the entire technology sector: Growth for the sake of

growth, without controls, is the road to chaos. Or as

many 20/20 market hindsighters might now put it, a

company ultimately will be judged by its profits and not

its revenues.

First

Step: Get Credit

This transformation of

the finance department and treasury started with a $6.5

billion credit facility that Hund-Mejean negotiated in

February with J.P. Morgan, Salomon Smith Barney and a

syndicate of banks. It proved to be a clear signal to

Wall Street that Lucent's revitalized treasury team

was serious about trying to establish a new era of

openness with the banking community. To be sure, though,

convincing the creditors and getting the deal done

didn't occur without some arm-twisting by both sides.

Lucent was in desperate

need of cash, and had a $2 billion credit facility

expiring at the end of February. At the same time,

Lucent was putting together a $3.6 billion initial

public offering of its Agere unit, a maker of

communications components that it was eager to sell amid

worries that Agere's ties to Lucent could hinder its

potential to do business with Lucent competitors.

Hund-Mejean saw an opportunity to use Agere's IPO as a

tool to negotiate the credit line for Lucent. Her plan

called for banks to structure a credit facility for $6.5

billion, with $2.5 billion of the debt to be assumed by

Agere. Because Agere had a good story, [that part of the

arrangement] was not a tough sell to the banks,

Hund-Mejean says. The $4 billion was more of a

challenge. We had to provide a plan, so the banks could

see how we could support it.

To answer mounting

questions from the lending community, Lucent held a

giant meeting involving 150 bankers from 40 banks. We

explained what had happened at Lucent, and laid all of

our cards on the table. Eyes went wide, she says,

recalling the sea of shocked faces in the audience. It

didn't stop there. Finance executives had one-on-one

meetings with bankers and held 40 individual

due-diligence meetings, with Lucent setting up the

meetings rather than the more common practice of a lead

agent coordinating the sit-downs. Still, some banks had

reservations, prompting Hund-Mejean to take a more

aggressive approach. If the banks would not negotiate a

new credit line, she would simply draw upon the as-yet

untouched $2-billion credit line that was coming due at

the end of month. Hund-Mejean was essentially telling

bankers, Do it with me or I'll do it alone. The tactic

worked, and sent a message to banks that she was serious

about shoring up Lucent's finances. Our No. 1 priority

was to get to know the banking community, Hund-Mejean

says. From that point on, we had quarterly calls with

banks to explain to them what was going on with the

company.

Vendor

Financing Fiasco

As they put together the

credit facility, Lucent's treasury team was

simultaneously dealing with its vendor financing

debacle, which had gotten so unwieldy that few within

the company had a handle on the severity of the problem.

Controlled primarily by Lucent's sales department,

treasury had little participation in reviewing finance

deals inked by its sales staff. When a finance official

did nix a proposed financing, sales people often went up

the executive food chain until they got the approval

they needed. The strategy helped fuel the 20% growth

rates that Lucent had been famous for, but pummeled the

company's finances. By Sept. 30, 2000, Lucent's

vendor financing portfolio had hit $8.1 billion, with

many of the loans made to startups that have since

folded or filed for bankruptcy. I would say that more

than 50% of Lucent's problems are due to the vendor

financing, says Cecilia Ricci, an economics and finance

professor at New Jersey's Montclair State University

who teaches courses on Lucent's vendor-financing

problems. At the time, everyone loved it

people money to buy your products. But the problems that

came from it were absolutely amazing.

To reverse what was

becoming an insurmountable tide, Lucent tapped Bank of

America to do a top-to-bottom review of its

vendor-financing program. The process took two months

and revealed shortcomings ranging from the absence of a

document review room to the lack of a loan-monitoring

mechanism. Lucent officials decided that if they were to

be in the lending business, they would need to mimic

banking institutions' practices and begin taking

reserves on every draw of a credit line. But it didn't

stop there. Lucent sharply curtailed its vendor

financing, only extending loans to companies that passed

the muster of a newly created credit review committee

that now meets weekly. Existing loans were restructured.

The moves have made gains: Lucent trimmed its

vendor-financing exposure by 32% to just over $5.5

billion by June. The challenge for us is now making sure

that we can help our customers leverage other people's

money, Hund-Mejean says. We want to help them craft a

new solution, yet not have it on our balance sheet.

The work didn't only

involve the balance sheet. Hund-Mejean also looked at

how her treasury team could better position itself to

guide the company through the work that had to be done.

Her answer? Growth. At a time when many treasury offices

were shrinking

workforce to 77,000 in September from 106,000 at the

start of 2001

team of six lieutenants who handle functions like

investor relations, workouts and customer finance, and

bolstered that with support staff. Today, the department

totals 166. Hund-Mejean also is trying to turn her

treasury department into a training ground, much like GM

has been for treasury professionals like herself. She

has a rotational training program for recent MBA

graduates to work in various treasury departments to get

a better understanding of how the department works.

Today, Lucent is in many

ways a very different company, as discipline imposed by

its finance department has helped streamline the

business. Hund-Mejean says she has the right amount of

liquidity, the vendor-financing business is under

control and, perhaps most important, the company burned

through just $281 million for the quarter ended Sept.

30. But while in some ways it is a very different

company, it still suffers from many of the same problems

it had a year ago.

The

Long Haul

To be sure, Lucent has

embarked on Phase 2 of its restructuring, which includes

plans to shed more businesses and reduce overall

headcount to between 57,000 and 62,000. But some argue

its product line hasn't kept up with the progress made

in finance. Despite its history of innovation, Lucent in

recent months appears to have been slacking off, missing

opportunities to stay in the game with competitors like

Nortel Networks. D'Amelio acknowledges that at one

point, our clocks were being cleaned, but argues that

Lucent's new products are doing quite well. Its

optical business, for instance, has dominated its

competitors for the last two quarters. The company is

also making a big bet on the next generation of wireless

technology, as well as a tiny transistor that could make

computer chips operate even faster. But significant

questions remain. Among them: Will Lucent be able to

remain independent after its failed merger attempt with

French telecom Alcatel? Can the company regain its

focus, much less return to profitability? How will the

industry's woes affect Lucent's ability to stage a

comeback, especially in light of a recent warning that

the industry slowdown will hurt revenues?

Even with D'Amelio and

Hund-Mejean's success, Lehman's Levy

rated Lucent stock a strong buy

pat Lucent executives on the back just yet. Financial

stability alone is not going to lead towards growth, he

says. Meeting customer demand is. We think they are

doing better at that, but the evidence is not

conclusive. He is even less certain about Lucent's

future as an independent company: I have no doubt that

they can go it alone, but whether they will or not, I

don't know.

Of course, the wild card

in a lot of the crystal-balling about Lucent is the

future of the tech sector itself. D'Amelio projects

that 2002 could bring with it a market decline of 20%,

which could derail Lucent's progress

Lucent's spirit, he says. It's a challenge, but this

market will turn, he says. We are a company that is

about financial fundamentals, and we are about

profitable growth for our customers and ourselves. To

me, this is all about the whole industry returning to

fundamentals.