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Eric Ng

Consumer electronics products-maker VTech Holdings is seeking more than US$170 million in compensation from Lucent Technologies whose consumer telephone unit it bought.

In a statement yesterday locally-listed VTech said it had filed a suit in a district court in New York against Lucent -  the world's biggest telecommunications equipment manufacturer - over the acquisition.

VTech alleges Lucent had defrauded it in the transaction 'by misrepresenting, concealing, and omitting to disclose required material facts, engaged in deceptive business practices, and breached representations, warranties and agreements'.

The news has added to analysts' concerns over VTech's purchase of the loss-making operations, against which the company took a restructuring charge of about US$3 million in the six months to September 30.

So far Lucent has yet to reply to the allegations.

VTech is seeking a monetary award of US$170 million plus 'additional damages'. It paid US$113.3 million for the unit.

The announcement came two days after Lucent in the US said it would cut some 10 per cent of its workforce of about 100,000, and absorb up to US$1.6 billion of restructuring charges after it posted an operating loss in the last quarter.

VTech, which last year said it controlled about 47 per cent of the United States' cordless-phone market, also makes electronic learning machines for children.

Last March,  in an effort to boost its presence in the US, VTech bought Lucent units which design and manufacture cordless and non-cordless telephones, answering machines and accessories.

At the time chairman Allan Wong Chi-yan said it had taken a year of negotiations to seal the deal and gave VTech an exclusive 10-year right to use the AT&T brand. Mr Wong said he believed it would allow VTech 'to become a one-stop shop for telephone products'.

VTech was a fund managers' darling just two years ago, due to its consistent growth.

It has since been hit by the weak euro and higher costs resulting from components shortages since the second half of 1999.

About two months ago, the company unveiled an unexpectedly-poor 97 per cent year on year drop in net profit - to US$800,000 for the six months to September 30 - resulting in a 30 per cent plunge in its share price.

When announcing the interim results, Mr Wong accused Lucent of managing the consumer-phone unit's inventory poorly in the four months prior to VTech's formal takeover.

This had forced VTech to sell inventory at a loss.

Over-production had resulted in an US$83-million over-stock of finished goods, according to Indosuez W I Carr analyst Ivan Lee Ming-kwong.

VTech's total inventory increased to US$300 million at the end of September from US$180 million a year earlier, due to the acquisition of Lucent's inventories, cancelled orders and component inventory build-ups in preparation for shortages.

'Although the inclusion of the AT&T brand can immediately lift sales of cordless phones by 50 per cent, the inability of VTech to control the production, the non-fusion of two sets of management and the high cost structure have put VTech in deep trouble,' said Mr Lee in a research report earlier this month.

In 1998, the Lucent units recorded a combined loss of US$115.2 million. In the first 10 months of 1999, they lost US$37.1 million.

In the report Mr Lee said the imposition of import tariffs by Mexico in October had hurt VTech's plan to source components in China and assemble phones in Latin America.

The development had prompted it to put its Mexican factories up for sale, which 'would probably lead to a layoff of 4,000 workers' and write-offs which would translate into an exceptional loss of US$20 million to US$30 million in the two years to March 2002, he said.



VTech suing Lucent for fraud