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Optical/IP

A Survey of the Corvis Food Chain

David Huber's optical empire ain't what it used to be.

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
Codeon Corp. $94,000 $- $94,000
ITF Optical Technologies Inc. $2,700,000 $2,900,000 $5,600,000
LightConnect Inc. $200,000 $- $200,000
Nufern $500,000 $900,000 $1,400,000
The Redfern Group (includes Redfern Broadband Networks (RBN) and Redfern Photonics Pty Ltd.) $1,200,000 $200,000 $1,400,000
TOTALS $11,688,000 $8,911,000 $20,599,000
Source: SEC filings


Table 2: Huber's Link to Corvis Suppliers
COMPANY Huber-Related Ownership
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
www.lightreading.com
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midyatspor1000 12/4/2012 | 9:33:08 PM
re: A Survey of the Corvis Food Chain I don't understand why you are publishing old news, we knew all of this stuff from day one, like you stated in the tables(source SEC filing), tell me something I don't know, something usefull, perhaps talk about the recent contract with the goverment, lately you been writing few articles critical of Corvis, I wonder why....show me one Optical Networking company that's not in deep trouble....where were you guys in yr 2000?
Elvis Doesn't Live 12/4/2012 | 9:33:07 PM
re: A Survey of the Corvis Food Chain Not sure what prompted this story Phil but the Corvis cheerleaders are still out there lurking in the bushes. Pay special attention to Mr. LOL himself Dave 7777777, Sparxe and the rest of the crew.

Beware
LightBeating 12/4/2012 | 9:33:07 PM
re: A Survey of the Corvis Food Chain Agreed, not much new info here, and also I don't see the point of the story. Conflicts of interest? The SEC requires these disclosures precisely for that reason, so this has always been puclic information, available to all Corvis shareholders.

Having been close to procurement issues at Corvis, I can say there was never any sort of pressure to buy from these companies. It's quite the opposite: Huber tended to invest in startups from which Corvis was already buying (eg. ITF, and I believe Nufern). In other cases, like Cidra, the company was founded at about the same time as Corvis, and not with the aim of becoming a Corvis supplier. Only when they had an interesting product for Corvis did they become a (tentative) supplier.

The point is: Huber has invested in startups that made products that were interesting, or even essential to Corvis. In some cases, Corvis itself has invested, but one can see that it's always much less than Huber or OCG. The case of ACME gratings is also a non-issue: ACME IS Corvis, and was created for Intellectual Property reasons. Its employees are Corvis employees and the facilities are colocated.


Only Dorsal is problematic. The article should have been more accurate in that the price at closing time was more like $40M. Anyone who would think that Huber did this to save his investment would be rather stupid... Dorsal has no more and no less chances of survival now that it's part of Corvis, or if it does, it's a matter of opinion, and business strategy. The price was too high, and shareholders voted with their feet, and that's why the closing price was half the original deal.

I don't want to absolutely defend Corvis or Huber. I'd just like to know why LR publishes stories like that, as if it were some kind of scandal. No off-balance sheet transactions here. Everything perfectly legal and ethical. Just someone's obsession with new technology, willing to spend his own money on it, and he's the one who lost the most.

LB
gea 12/4/2012 | 9:33:06 PM
re: A Survey of the Corvis Food Chain I don't agree. This is one of the few times that Lightreading has dug deeper down and got us some FACTS. I like this article quite a bit.

And as for...
"No off-balance sheet transactions here. Everything perfectly legal and ethical. Just someone's obsession with new technology, willing to spend his own money on it, and he's the one who lost the most."

Well, everything here is most probably legal here, but it certainly doesn't LOOK too good (and anyone who disagrees with the notion that it doesn't LOOK good isn't being honest).

This of course doesn't mean that it isn't above-board. Certainly, the conflict-of-issues questions can rightly be asked.

As for my personal opinion (which may be worth a ton), Huber increasingly looks to me like a man who has some gigantic ambition, and who is not willing to budge on his vision. This vision seems to get in the way clear thinking, but it doe have some advantages.

In the case of the optical component vendors in question, it could be argued that there is need for a closer relationship than other optical companies have with their suppliers. This is because Raman amplification has need of filters and gratings that are not used in standard EDFA-based WDM. Possibly, if one of Corvis' suppliers failed, then Huber's baby would be in real jeopardy.

I'd certainly love to see a follow up here, examining whether the components Corvis buys from these in-house vendors is readily available elsewhere (and seeing how LR has launched components coverage, that might be a timely suggestion).

If you ask me, Huber doesn't want to merely rake in cash...he wants to ascend to the heights of technological glory and be hailed as a visionary. He wants to be the optical world's Steve Jobs. And it is that giant ego that will either wreck Corvis is cause it to reign supreme when things heat up again.
CogswellCogs 12/4/2012 | 9:33:04 PM
re: A Survey of the Corvis Food Chain Is anyone surprised? This goes way back to LR having a hissy fit about Huber not breaking his silence on their products to LR when he was keeping everyone in the dark.

Does anyone remember the nasty statement about Corvis that was the Quote of the Week on the LR homepage a while back? I believe it was from the head of Sycamore (competitor, LR advertiser), and it was quickly yanked when Corvis complained... hmmm, almost as if it was untrue and legal action could have been coming. Typical.

Here's a great idea for the April Fool's Day edition of LR - an article telling how the Corvis customers are uneventfully carrying live traffic, the equipment performs just as they said it would (if not better - see distance between regen articles in other sources), and the only deployed OOO switches in the industry are in place and working. Of course, all of the things are true but you won't see them mentioned in any articles here.

Rememeber the LR motto - don't let the facts get in the way of a good story, and woe be to those who don't kiss up.

Cogs
photons-r-us 12/4/2012 | 9:33:03 PM
re: A Survey of the Corvis Food Chain Cogswell : you sound like a little Cog in the big Huber machine.

I thought this story by LR was quite insightful and some very thorough reporting. It exposes the incesteous relationships that are going on within Hubers organizations, the most prominent being the Dorsal "deal". There is alot going on there , and not to the benefit of the shareholders of Corvis, IMHO.


dave77777 12/4/2012 | 9:33:02 PM
re: A Survey of the Corvis Food Chain Huber's optical keiretsu is not exactly breaking news. If you don't know much about Corvis, it's a nice read. I might add that while this type of arrangement is under more scrutiny since Enron etc., there's certainly nothing unethical about it per se. It's just a business philosophy that might succeed and might fail. Of course, if you've been studying Corv for any amount of time, you should already know everything in this article.

A groupie? Well, as an investor I am certainly interested in any tidbit of info re Corv. A cheerleader? Not really. My position has always been they are relatively well-positioned for a recovery in LH spending. Don't think they're worldbeaters, don't think they suck. Their biggest advantage imho is their big stash of cash, a happy accident due to the timing of their IPO.

The LOL is generally for people who say amusing things like Corv will be bankrupt next quarter, or Corv eq "doesn't work". What else can you do but laugh at statements like those? Gotta keep your sense of humor, esp in times like these. Speaking of which, what was that quote from Sycamore? Ought to be good for a laugh.
LightBeating 12/4/2012 | 9:32:59 PM
re: A Survey of the Corvis Food Chain Gea,

O.K. Let's look at the substance behind the facts.

Off the $20M the article is talking about, $11M went to ACME. As I said ACME is Corvis. It is owned 99% by Corvis, and there is no distinction between an ACME employee and a Corvis employee. As a matter of fact, I believe ACME was founded by Huber prior to Corvis. ACME makes the gratings, and it's just a question of licensing why it exists. So in this case, it's not a startup basing its business plan on Corvis.

The second largest one is ITF, which sells Raman pump combiners. This totals $5.6M over 2 years. ITF was founded in 1997, same year as Corvis. Do you think they based their business plan on Corvis? And in this case, Huber owns a whopping 0.4% of the company!!! He chipped in a few bucks in one of their later rounds of funding. But Corvis was already buying plenty of stuff from them at that time.

Cidra was also founded around 1997, and did not sell anything to Corvis until 2001! Cidra developed a sensor system for the oil industry, which they succesfully sold for a few hundred millions. Corvis was not involved in any of this, but Huber helped start the company, and was on its board since its inception. At some point, Cidra used their technology to make, I believe, network monitoring devices, which Corvis eventully bought because that's what they needed. Here we're talking less than one million dollars.

LightConnect: big conflict here, Huber owns 1.4%, and Corvis bought $200K from them. That's Enron stuff for sure!

Nufern makes photosensitive fiber to make the gratings. Again, with a big $500K in purchase in 2001, and a less than 10% stake by Huber, I can't see what the big deal is. The point is, there were only a handful of suppliers for that fiber. At some point Nufern were the only ones to make a usable fiber. Huber thought this would become very big, and he invested in the company to help it grow. But just to show how there was no conflict of interest: at some point, Corvis decided to make its own fiber. That was approved by Huber himself! The plan was never executed because of the downturn, but nevertheless, the fact that Huber had a stake in Nufern was never a factor in the purchasing decisions.

The other big one is Redfern, and I think they more or less ceased to exist.

The point is, this picture of Huber with his "tangled web" of companies is hardly worth talking about. Compared with the amounts that Nortel and others paid for a string of useless acquisitions, I really don't see much here. Sure, Huber has a big ego, but is he the only one???

LB
deer_in_the_light 12/4/2012 | 9:32:52 PM
re: A Survey of the Corvis Food Chain Come on LR, look at Chambers and the CSCO very incestuous investment at all levels, this is child play ...
MrLight 12/4/2012 | 9:32:51 PM
re: A Survey of the Corvis Food Chain kei-+ret-+su Pronunciation Key (k-rts)
n. pl. keiretsu or kei-+ret-+sus

Main defintion:

A network of businesses that own stakes in one another as a means of mutual security, especially in Japan, and usually including large manufacturers and their suppliers of raw materials and components.

If Corvis is trying to establish a keiretsu it is a slightly different way of doing it than most.

We would need to add this ancillary definition to the dictionary:

A network of businesses where one owns stakes in the others as a means of mutual security, especially in America, and usually including large manufacturers and their suppliers of raw materials and components.

However, I don't know enough about the details of the situation to comment further.

So my only concern would be that:

1.ACME Grating Ventures/ACME LLC
2.Cidra Corp. (Nasdaq: CIDC)
3.Codeon Corp
4.ITF Optical Technologies Inc.
5.LightConnect Inc
6.Nufern
7.Redfern Broadband Networks (RBN)(The Redfern Group)
8.Redfern Photonics Pty Ltd. (The Redfern Group)

have a diversified customer base so that Corvis only accounts for less than 20% of their sales if they are/become public companies.

MrLight :|
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