Two of the primary reasons AT&T Corporation chose to spin off its equipment manufacturing business was to permit it to profit from sales to competing telecommunications providers; these customers had previously shown reluctance to purchase from a direct competitor. Bell Labs brought prestige to the new company, as well as the revenue from thousands of patents.
At the time of its spinoff, Lucent was placed under the leadership of Henry Schacht, who was brought in to oversee its transition from an arm of AT&T into an independent corporation. Richard McGinn succeeded Schacht as CEO in 1997. Lucent became a "darling" stock of the investment community in the late 1990s, rising from a split-adjusted spinoff price of $7.56/share to a high of $84. In 1997, Lucent acquired Milpitas based voice mail market leader Octel Communications Corporation for $2.1 billion, a move which immediately rendered the Business Systems Group profitable. By 1999 Lucent stock continued to soar and in that year Lucent acquired Ascend Communications, an Alameda, California–based manufacturer of communications equipment for US$24 billion. Lucent held discussions to acquire Juniper Networks but decided instead to build its own routers internally.
On January 6, 2000, Lucent made the first of a string of announcements that it had missed its quarterly estimates, and when it was later revealed that it had used dubious accounting and sales practices to generate some of its earlier quarterly numbers, Lucent fell from grace. In November 2000, it also disclosed to the Securities and Exchange Commission that it had a $125 million accounting error for the third quarter of 2000. Subsequently, its CFO, Deborah Hopkins, Left the company in May 2001 with Lucent's stock at $9.06 whereas at the time she was hired it was at $46.82.
By October 2002, when its stock price bottomed at 55 cents per share, Henry Schacht had been brought back on an interim basis to replace McGinn. Patricia Russo was named permanent Chairman and CEO, succeeding Schacht who remained on the Board of Directors.
In April 2000, Lucent sold its Consumer Products unit to VTech and Consumer Phone Services. In October 2000, Lucent spun off its Business Systems arm into Avaya, Inc., and in June 2002, it spun off its microelectronics division into Agere Systems. The spinoffs of enterprise networking and wireless, the industry's key growth businesses from 2003 onward, meant that Lucent no longer had the capacity to serve this market.
Lucent was reduced to 30,500 employees, down from about 165,000 employees at its zenith. The layoffs of so many experienced employees meant that the company was in a weakened position and unable to reestablish itself when the market recovered in 2003.
Lucent continued to be active in the areas of telephone switching, optical, data and wireless networking.
On April 2, 2006, Lucent announced a merger agreement with Alcatel, which was 1.5 times the size of Lucent. Serge Tchurk became non-executive chairman, and Russo served as CEO of the newly merged company, Alcatel-Lucent, until they were both forced to resign at the end of 2008. The merger failed to produce the expected synergies, and there were significant write-downs of Lucent's assets that Alcatel purchased.