2001 Top Ten: Financial Stories
Financial follies flourished in 2001, as just about everybody focused on the bottom line. The story became about making money, or in most cases, about losing money.
Several large events dominated the markets, as well as the Light Reading Index. What made things tick? Light Reading editors have put together a list of the most influential financial stories below.
No. 10: Tellabs Buys Ocular
In many ways, Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) buying Ocular Networks Inc. for $355 million marked the new face of M&A in the networking startup market (see Tellabs Nabs Ocular). In the old days, the deals were Goliaths, in the billions of dollars, done predominately with stock. The Ocular deal varied from the old-style deals in many ways. First, it was relatively small, but mostly paid in cash. Secondly, this acquisition was not made for some speculative new optical technology, but for a very pragmatic, next-generation, optical crossconnect that fit well with legacy technology.
Why did Ocular sell? Most likely because it had a hot product but was having trouble breaking into the RBOC customer base as a startup. The funding environment did not bode well for startups in protracted struggles to gain RBOC customes. Thus, Ocular turned to Tellabs for access to its sales channel.
Strategically, this deal makes a lots of sense, though Tellabs does not have a good history of melding its stodgy Midwestern culture with those of startups (anybody remember NetCore?). But one thing was certain: Tellabs had to do something, and it looks like it bought the right player for its market.
- Light Reading's Top Ten Private Companies
- Ocular Takes On Tellabs
- Tellabs Pulls a Switch
- Tellabs Pins Hopes on Optical
- Tellabs Losing Its Edge?
No. 9: Nokia Buys Amber
This deal, in which Nokia Corp. (NYSE: NOK) paid $421 million to buy edge routing startup Amber Networks (see Nokia Nabs Amber for $421M, was the largest acquisition of a startup in the networking systems market in 2001 – which speaks volumes about the M&A climate. Not much is happening (see M&A Activity Continues to Crawl). Compare this deal with the large startup systems deals of 2000: Nortel Networks Corp. (NYSE/Toronto: NT) buying Alteon for $7.3 billion (Nortel Buys Alteon for Big Bucks ; Cisco Systems Inc. (Nasdaq: CSCO) buying Arrowpoint for $5.7 billion; Ciena Corp. (Nasdaq: CIEN) buying Cyras for $2.6 billion (see Ciena To Buy Cyras for $2.6 Billion). The market has changed a bit.
This deal also says a lot about where routing technology is going. Nokia says it bought Amber to integrate the company’s fault-tolerant edge routers into its wireless products. In short, routing is moving to the edge, and wireless may be one of its largest future applications.
No. 8: Riverstone’s IPO
As one of the first IPOs in 2001, Riverstone Networks Inc. (Nasdaq: RSTN) was closely watched (see All Eyes on Riverstone IPO ). Like Tellium (see No. 7), Riverstone was pushing for an IPO as the telecom market was collapsing, and it was a race to get out the door on a dismal market day (see Riverstone IPO Toughs It Out). Led by Morgan Stanley Dean Witter & Co., the offering raised $120 million for the company.
Ironically, though times were tough, the timing of Riverstone’s IPO has led investors to look more rationally at networking stocks. At around $14 recently, Riverstone still trades above its IPO price.
No. 7: Tellium's IPO
Many skeptics didn’t think Tellium Inc. (Nasdaq: TELM) had the mojo to pull off its IPO. But the company managed it at the last minute (see Market Gives Tellium a High Five), slipping through the IPO door just before it was slammed, locked, and welded shut. Barely a peep has been heard in the IPO market since.
The IPO itself was not a huge one. The company raised $135 million, selling 9 million shares for $15 a piece, and rose 40 percent in the first day, briefly attaining a market cap of about $2.5 billion. Compare this to the blockbuster IPOs of 2000: Corvis Corp. (Nasdaq: CORV) raised $1 billion and attained a market cap of $30 billion, though it now trades at only $1 billion; ONI Systems Inc. (Nasdaq: ONIS), which also went off in the summer of 2000, raised $200 million and attained a market cap of $10 billion. But at least Tellium got it done. Clearly, the company needed to raise the cash, and it was the last of the optical players to do so before the public capital markets closed down. Unlike Riverstone, Tellium’s stock now trades below its IPO price, at about $6 per share.
The next interesting thing to watch in the IPO market is who will test the waters to see if the coast is clear. Light Reading reckons that Unisphere Networks Inc. has a shot (see Light Reading's Top Ten Private Companies). It may be the next litmus test of the market.
No. 6: Intel's Optical Binge
Intel Corp. (Nasdaq: INTC) didn’t make one deal, but rather an entire series of them. The chip player has a hankering for the communications market, an area it's never dominated. This time, Intel decided that optical components and integrated optics are the places to play in the future.
Throughout 2001, Intel started acquiring a portfolio of optical and communications chip startups, including Cognet, nSerial, and LightLogic. Later, it quietly snagged Templex Technology, a maker of Fiber Bragg Gratings (FBGs) that was also developing Temporally Accessed Spectral Multiplexing (TASM) technology (see Intel Snaps Up Templex ).
Early on, Intel was especially busy on the venture investment side of the market, to the point at which many startups felt its investment activity was serving more as a research and espionage function than it was as a way to make money (see Intel's Optical Attack Makes Waves). One thing is for sure – Intel is serious. In addition to making several outright purchases, at last count it had invested in more than 30 optical startups, including high-profile systems companies such as PhotonEx Corp. (see Intel Backs VCSEL Startup). And despite the slowdown, Intel hasn’t grown gun-shy, as seen by recent activity:
- Intel Capital Still Looking for Deals
- Intel Still Seeking Startups
- Intel Invests in Scottish Foundry
For more on Intel’s optical moves:
- Intel Targets Telecom Server Market
- Intel Swaggers Into OC192 Market
- Novera Optics Scores $83 Million
- Intel Announces Optical Silicon Solutions
Although Sycamore Networks Inc. (Nasdaq: SCMR) never held the power or bulk of Lucent Technologies Inc. (NYSE: LU) and Nortel, it was the spiritual leader of the optical startup market, having pulled off the first in a wave of gigantic IPOs in 1999.
After going public, Sycamore at first grew quickly with its anchor contract with Williams Communications Group (NYSE: WCG), but it then hit a wall developing next-generation switching products, and the Williams contract dried up. All of this culminated with this bomb: On April 5, Sycamore issued an earnings warning in which it said that quarterly revenues for its third fiscal quarter of 2001, ending in April, would drop from $150 million in Q2 to a range of $50 million to $60 million, or about 60 percent, essentially converting the company from an emerging optical powerhouse to a startup (see Sycamore Drops a Bomb). This announcement started a round of brutal restructuring and layoffs for the company.
Months later, Sycamore is focusing on reworking its product portfolio (see: Sycamore Awaits Savior in SN16000 and Sycamore: Sick No More?). With about $720 million in cash and short-term investments as of Oct. 27 (that’s down from $1.1 billion during the same period in 2000), the company still has some time. But Chairman Desh Deshpande and CEO Dan Smith are no longer optical networking’s golden boys. They’ve got to prove they have new skills as turnaround artists.
More on Sycamore’s sad story:
- Sycamore Comes To Town
- Sycamore Gains Access
- Sycamore Ships Its Optical Switch
- Sycamore's Show-Stopper
- Sycamore Goes the Distance (At Last)
- Sycamore Rings Up BellSouth
- Sycamore Raises Forecasts
- Sycamore Spreads Its Roots
- Street Gets Tough on Sycamore
- Sycamore Dodges Cisco Flu
- Sycamore Hit by Capex Cuts
- Sycamore Waterlogged
- Sycamore Enters Crisis Mode
- Sycamore Hits Lowered Target
No. 4: Nortel's Cluster Fudge
Thoughout the deteriorating optical market in late 2000 and early 2001, Nortel executives mastered the art of denial, at first telling Wall Street there was absolutely nothing wrong, though Wall Street had serious trouble believing this story (see Nortel's Fright Night, Nortel Bashing Continues, and Nortel's Roth Feels Bullish). Then, beginning in 2001, rumors began to float that Nortel’s problems were bigger than they were letting on. Nortel’s financial problems accelerated, beginning with the announcement of a 4,000-employee layoff (see Nortel to Cut 4,000 Jobs) and then a sudden earnings warning in February (see Nortel's Nasty Surprise). What had started as quiet problems grew into large fundamental shortfalls.
The February warning was followed by yet another warning one month later, in March – two warnings for the same quarter. Along with the earnings warning came the announcement that the company would trim some 15,000 more jobs (see Nortel Warns of Shortfall, More Layoffs and Nortel: Losses and Layoffs, Eh?). At the same time, Nortel CEO John Roth made his now-famous “no meaningful guidance” statement and continued a policy of not telling Wall Street what to expect in the future.
A few months later, on June 15, 2001, Nortel dropped its biggest earnings bomb to date (see Nortel's Nuclear Winter). The announcement amounted to a giant house-cleaning, replete with: a huge net loss ($19 billion total); writeoffs of intangible assets ($12 billion); more layoffs (10,000 of them, giving the company a total of 30,000 for 2001); and, more importantly, the first real recognition from company management that something had gone terribly wrong. Though Nortel’s share price had already been in steep decline, this was the news that for the first time since 1997 drove it into the single digits.
Moral of the story? When the CEO’s not talking, expect the worst.
No. 3: JDSU's Atomic Writeoff
Another one of the leaders in optical denial, JDS Uniphase Inc. (Nasdaq: JDSU; Toronto: JDU), like Nortel, put off its troubles (see JDSU: There's No Industry Slowdown). Then they caught up with it.
Writeoffs are forever downplayed by the beancounters as “accounting moves” that deal more in virtual dollars than cold, hard cash. Nonetheless, they are real events, and there were plenty of gargantuan accounting writeoffs in 2001. Among them was JDSU’s whopper (taking the No. 1 spot in Light Reading's 2001 Top Ten: Components). Announced on July 26 and put into perspective in a note from an investment banker as follows:
- Our estimate of the market value of the entire offshore drilling segment is about $35 billion (after accounting for a decline of 30 to 50 percent from most of the companies during the last several months). JDSU just lost $50.6 billion. That is 1.5 times the entire offshore drilling industry and a little over 1/3 the entire market value of the oilfield drilling industry.
Again, this was a reflection of the inflated paper values paid for acquisitions in company stock. For JDSU, this culminated in its merger with SDL.
In late 2000, the Lucent board finally took steps to stem its mounting losses by firing former CEO Richard McGinn (see McGinn: McGone). Henry Schacht, the Lucent Chairman who took over for McGinn, put in place a formal restructuring plan, which involved a whole lot of slashing and burning, sale of non-core assets, layoffs, and product rationalizations (see Lucent Restructuring: Mixed Bag).
The victims were large and many:
- Schacht immediately brought in a “crisis” mentality that McGinn had avoided for months (if not years).
- Lucent CFO Deborah Hopkins, a McGinn protègé, took a hike (see Lucent CFO Quits, World Yawns).
- Agere Systems (NYSE: AGR) was spun out of Lucent to a dismal greeting on Wall Street (see Agere's Fistful of Dollars).
- In the grand garage sale known as Lucent, pieces of the company were lopped off to feed the debt monster. In addition to Agere, these included various manufacturing plants (see Lucent Sells Plants) and the Optical Fiber Division (OFD) (see Lucent's $5 Billion Question and Lucent Sells Fiber Biz for $2.75B).
And then there was the sideshow of a potential blockbuster merger between Alcatel SA (NYSE: ALA; Paris: CGEP:PA) and Lucent, before the boardroom egos got in the way (see: Lucent/Alcatel Rumors Fly, Alcatel/Lucent Work Continues, and Alcatel, Lucent Throw in the Towel).
On the technology side, Lucent’s most sweeping moves came in the metro networking department, where the company wiped the floor clean of much of 2000’s activity. The various optical networking pieces were shuffled and reshuffled (see Lucent Shakes Up Optical Group) . The remains of Chromatis Networks, acquired by Lucent in 2000 for a mere $4.5 billion (see Lucent Catches Chromatis), were rejiggered and eventually shut down (see Lucent Ditches Chromatis).
Through all of the reductions and sales of non-core assets, managing Lucent’s books was a challenging task, and the company’s biggest challenge has become stemming losses and managing cash flow so as to keep its creditors of its back (see Lucent: Devil in the Details?). Watch carefully: If Lucent does not make progress according to the strict terms of its credit agreement, the company could still see more trouble in 2002.
No. 1: LR Index Tumbles 66%
In some circles on Wall Street, they are still laughing about peaks and hype associated in 2000 with the “optical sector.” In others, they are crying. Any way you look at it, it was a bubble. During 2001, the Light Reading Index dropped 66 percent from its 2001 starting point of 618, wiping the bulk of market capitalization off many of the largest players in the market.
The huge decline was set off by a deterioration in the fundamentals of the leading players such as Cisco, Lucent, and Nortel. Many of the aforementioned events (see Nos. 2, 3, 4, and 5) played major roles in knocking the market down further. The whole conflagration had been fueled by the enormous cuts in spending by the leading telecom carriers, which grappled with financial imbroglios of their own. Inventories mounted, bankruptcies multiplied, and demand dried up. All in all, the once high-flying industry came screeching to a halt, and investors made a run on the optical bank, yanking their money out and driving the most inflated stocks down to the teens or single-digits (see 2001 Top Ten: Share Price Collapses).
— R. Scott Raynovich, U.S. Editor, Light Reading