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ADC's Power Investment Strategy

Light Reading
News Analysis
Light Reading
11/15/2000

This morning's announcement that ADC Telecommunications Inc. (Nasdaq: ADCT) led the latest funding for optical startup Cinta Corp. (see Cinta Secures $36M 2nd Round) is just the tip of an iceberg that's been quietly growing for more than two years.

That iceberg is ADC's optical networking investment strategy, consisting of a two-pronged approach that includes startup investment and acquisitions.

ADC's been particularly adept at spotting startups. Way back in October 1997, for instance, ADC invested $6 million in Optical Networks Inc., which subsequently became ONI Systems Inc. (Nasdaq: ONIS). In April 1999, it invested a modest $3.5 million in Siara Systems, then offered that company a credit line worth about $5 million more. Two years later, equity in ONI and Redback Networks Inc. (Nasdaq: RBAK) -- which acquired Siara -- have helped ADC rack up $1.6 billion in investments, of which $1.5 billion are "marketable securities," or shares in publicly traded companies ADC backed early on.

It's returns like these that are helping ADC make a name for itself in optical venture funding. They also don't hurt the vendor's bottom line or its attractiveness as a stock pick for investors with an eye on optical futures. ADC says it expects its next quarterly results (due November 28) to show even more investment payback.

For the record, neither ADC nor Redback have disclosed the extent of ADC's holdings in Redback. But at the time Siara merged with Redback early in 2000, ADC and its CEO William Cadogan jointly owned 7.8 percent of all Siara's outstanding capital stock.

Earlier this year, ADC formalized its startup investment tack by forming a venture capital fund, ADC Ventures, and outfitting it with a $100 million commitment from ADC's general fund. But the vendor is clear that the step was just a milestone in an ongoing project. "ADC has been making strategic investments dating back to 1996," wrote ADC spokesperson Chuck Grothaus in an email to Light Reading today. "We only formally set up the Ventures fund to emphasize the fact that the company is interested in start-ups that potentially could have an impact on our core business."

ADC Ventures execs stress that relevance to ADC's core business -- broadband connectivity, access, and transport -- is crucial to success. "Twelve months from now, I'd like to go back and see that our strategic investments resulted in new commercial relationships, acquisitions, or better solutions for customers," says Gokul Hemmady, managing director of ADC Ventures. He says picking startups with these advantages in mind helps keep investments focused.

So far, the fund's issued over $72 million to various startups. Besides ONI and Redback, it's backed a bunch of privately held optical companies, including the following:

  • Northstar Photonics (no Web site yet) -- optical lasers -- $2.5 million in June 2000
  • Optical Switch Corp. -- optical switching fabrics -- $5 million in April 2000
  • Optigain -- erbium doped fiber amplifiers -- $1.3 million in July 1998
  • PacketLight --optical transport switch -- $4.5 million in July 2000
  • Yafo Networks -- fiber optic subsystems -- $2 million in April 2000.


  • ADC Ventures isn't focused on optical startups alone: It's also invested early in a range of other broadband companies with expertise in DSL, wireless, routing, and general IP, including Efficient Networks (Nasdaq: EFNT), GlobeSpan (Nasdaq: GSPN), InterWave Communications, and Vyyo (Nasdaq: VYYO).

    The second arm of ADC's optical investment formula involves acquisitions. Here, ADC's been aggressive in picking up optical components makers in an effort to build its own arsenal of optical parts: In May, it spent about $872 million for Altitun, a maker of active optical components; and about $80 million for Ibsen Micro Structures, which makes a number of optical components, including fiber Bragg gratings.

    Overall, ADC's approach seems to work because it's focused on helping to build particular areas of the company's business -- ones that, like optical networking, have been spotted as key to future business. "It's the Cisco model," says Alan Bezoza, analyst with CIBC World Markets. "Making investments where it may pay off later, picking spots where the market is favorable."

    Hemmady stresses the importance of staying in touch with the market. "For the past couple of years, a lot of money's flowed into solving problems that were well known." Over the next three years, he says, investors will have to be more intuitive about spotting companies that are solving problems that may not be so well understood.

    -- Mary Jander, senior editor, Light Reading http://www.lightreading.com

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