As the telecom recession wears on, the startups linked to Huber's crown jewel, Corvis Corp. (Nasdaq: CORV), can no longer rely on the long-haul optical transport system maker as much as they once did. Of course, that's not to say that the startups that supply Corvis are in trouble themselves. On the contrary, several of them enjoy diverse customer bases.
But a look at Huber's reach through Corvis paints an interesting picture of how a web of companies -- some of which are partially propped up by their peers -- can unravel in a harsh economy, taking much of Huber's wealth with it.
Some background: Huber, an outspoken technologist, owns about 25 percent of Corvis and about 34 percent of Optical Capital Group (OCG), a venture firm he founded (see Corvis CEO Addresses Lightspeed). Over the past two years, Corvis has bought more than $20 million in components and other products from companies that are partially owned by Huber and/or OCG.
Table 1: Corvis Startup Suppliers
|COMPANY||Purchases by Corvis in 2001||Purchases by Corvis in 2000||TOTALS|
|ACME Grating Ventures/ACME LLC||$6,100,000||$4,911,000||$11,011,000|
|Cidra Corp. (Nasdaq: CIDC)||$894,000||$-||$894,000|
|ITF Optical Technologies Inc.||$2,700,000||$2,900,000||$5,600,000|
|The Redfern Group (includes Redfern Broadband Networks (RBN) and Redfern Photonics Pty Ltd.)||$1,200,000||$200,000||$1,400,000|
|Source: SEC filings|
Table 2: Huber's Link to Corvis Suppliers
|ACME Grating Ventures/ACME LLC||Corvis 99%, Huber 1%|
|Cidra Corp. (Nasdaq: CIDC)||Huber 16%, Larsen 0.3%, OCG 2%|
|Codeon Corp.||Huber 7%, Larsen 2.8%, OCG 3%|
|ITF Optical Technologies Inc.||Huber 0.4%|
|LightConnect Inc.||Huber 1.4%, OCG 4%|
|Nufern||Huber 7%, Larsen >1%, OCG 6%|
|Redfern Broadband Networks (RBN)||OCG 16%|
|Redfern Photonics Pty Ltd.||Huber and Larsen, 7%|
|Source: SEC filings|
Note: SEC filings state that Corvis invested $3 million in Redfern Broadband Networks but Corvis's ownership percentage in that company is not disclosed.
"[After its IPO], Corvis was a cornerstone of these companies' business plans," says J.P. Morgan Chase Bank & Co. analyst Jeff Lipton.
This matters because Huber benefits financially each time Corvis spends money with any of the companies in his or OCG's portfolio. And it's Huber's history of self-dealing that both worries Corvis investors and fires up his critics.
One deal Corvis critics love to hate is the company's acquisition of Dorsal Networks for more than $90 million. Huber owned 31 percent of Dorsal and Corvis already owned 3 percent at the time the deal took place. Dorsal's other big shareholder was Huber's VC firm, OCG (see Corvis Dorsal Deal: A Huber Spin-In?).
"Our perspective is what Huber did in buying Dorsal Networks is just ridiculous," says Rengan Rajaratnam, a VP at Galleon Group, a New York-based hedge fund. Galleon Group, by the way, recently sold its stake in Corvis at a loss, partly because of frustration with Corvis about the appearance of insider deals such as Dorsal.
The Dorsal deal also gave Corvis a new president, Jim Bannantine, and Huber another close ally among Corvis's top brass (see Dorsal Chief Takes Over at Corvis and Corvis Loses Sales VP; Gains President). Bannantine took the helm at Dorsal after a stint as CEO of Enron South America. Other high-ranking managers within Corvis include Lynn Anderson, Corvis's CFO, who previously served as CFO of OCG; and Kim Larsen, Corvis's general counsel and Huber's brother-in-law.
Besides Dorsal, Corvis has made more than $20 million in purchases from companies that Huber has a stake in either individually or through Corvis or OCG. One example is ACME Gratings Ventures LLC, an in-house supplier of components to Corvis that's owned by Huber and Corvis (see Corvis Keeps Gratings in the Family). [Ed. note: ACME also has an exclusive deal with Wile E. Coyote.]
Another example is Codeon Corp. Corvis bought about $94,000 in components from Codeon in 2001. At the time, Huber indirectly owned about 7 percent, OCG owned 3 percent, and Kim Larsen owned about 2.8 percent. But Codeon is noteworthy for another reason: It illustrates Corvis's waning support of Huber-related startups while its own business has slowed to a crawl.
In 2001, Corvis committed to purchase $12 million in components over the next 18 to 24 months from Codeon. Thanks partly to a slowing economy, Corvis cancelled that commitment as of March 2002.
Are such tight-knit arrangements between Corvis and Huber-related startups legal? Sure. Is it worrisome? Opinions vary.
"Its not necessarily wrong if [Huber] feels that there's a technological benefit [Corvis] can't get from somewhere else," says J.P. Morgan's Lipton. "It is a way to fund some portion of research and development off the income statement.
"However, when you look at the big picture, you don't want the management team losing focus by spending too much time doing venture capital and working with other businesses."
In the boom times, the self-dealing between Huber and Corvis were, for the most part, shrugged off. But after Corvis's tumble from the heady days of 2000, there's been renewed focus on whether the company can save itself, let alone a network of startups.
"The real important issue [for Corvis] is the same as it's always been -- winning contracts and generating sales," says Simon Leopold, an analyst at Merrill Lynch & Co. Inc.
Of course, Huber himself has watched much of his own wealth evaporate over the past couple of years. In 2000, Forbes magazine put Huber's net worth as $8.2 billion in its annual listing of the 400 richest Americans. Huber hasn't been ranked since.
These days, Huber owns about 104 million shares of Corvis stock. So each time its stock price drops $1, Huber loses roughly $104 million in paper wealth.
That's sobering, given that Corvis shares have dropped more than 100 points in just over two years. In August 2000, shares of Corvis traded at more than $108. The price has been below $1 since May 31, 2002, and on October 11 Corvis closed at $0.55 a share.
Though Huber's startup deals have been quiet, Corvis's slide hasn't escaped investor scrutiny. "Corvis is a company whose only asset right now is its cash," says Rajaratnam. "To investors, it's worth more dead than alive."
In the end, Huber's startups may continue to feed off Corvis in one way or another. But it's likely the bites will be smaller and, on the whole, a lot less nourishing.
— Phil Harvey, Senior Editor, Light Reading