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Corvis Dorsal Deal: A Huber Spin-In?

Light Reading
News Analysis
Light Reading
1/30/2002

With a terrestrial long-haul market hovering just above rock bottom, Corvis Corp. (Nasdaq: CORV) has decided to dive into the sea. The maker of optical network products announced yesterday that it had signed a definitive merger agreement to acquire Dorsal Networks communication systems. The deal is expected to close in the second fiscal quarter of 2002 (see Corvis Goes Underseas).

Most analysts appeared puzzled by the deal. They don't see how the product will add to Corvis's financials any time soon. And at a time when most optical switching vendors are buckling down to save cash, the deal seems like an aggressive play to enter a tightly controlled market.

But there's additional intrigue in the deal: David Huber, Corvis's founder, chairman, and CEO, was also chairman at Dorsal. Did Huber step in to save this small company before it ran out of cash?

One analyst, who has requested to remain anonymous, says he thinks he knows the answer. “Everyone knows that nothing happens at Corvis without [Huber’s] blessing,” he says. “[Dorsal] was probably running out of money.” He said that it's likely that Huber stepped in to the rescue. The analyst didn't believe Corvis’s claims that Huber had removed himself from the decision-making process.

A Corvis press release says that Huber removed himself from the negotiations because of his position as chairman at both companies. But the same release also states that as a controlling shareholder, Huber voted for the deal.

Corvis will acquire Dorsal in a stock transaction for about 40 million shares of Corvis common stock, or approximately $87 million based on yesterday’s closing price of $2.18 per share. This excludes the 3 percent stake in Dorsal that Corvis acquired through a previous agreement. All the outstanding Dorsal options and shares held by employees will be exchanged for options and shares in Corvis.

“With this acquisition, Corvis will become one of the few end-to-end vendors of next-generation terrestrial and undersea optical network solutions,” said Dr. Terry Unter, Corvis chief operating officer, yesterday during a conference call about the acquisition. “For only about 10 percent of Corvis, we can nearly double our market opportunity.”

Many observers, however, are skeptical. The announcement came just a day after Global Crossing Ltd. (NYSE: GX), an international leader in undersea fiber optic telecommunications networks, filed for the fourth-largest corporate bankruptcy in U.S. history, which goes to show that the Submarine Systems market has been just as hard hit by the difficult economy as the terrestrial market. In addition, this segment of the market is highly consolidated, with Alcatel SA (NYSE: ALA; Paris: CGEP:PA), KDD, and Tyco International Ltd. (NYSE: TYC; London: TYI) controlling about 85 percent of the market share.

"It’s extremely tough for a small player to break [into the undersea market],” says Thomas Weisel Partners analyst Hasan Imam, pointing out that new builds are scheduled at least three years in advance. “Especially with the market the way it is now.”

While Dorsal’s president and CEO Jim Bannantine said on the call that he expected the company to start bringing in revenue sometime in 2003 and to have products available when the market demand starts picking up in 2004, Imam says that with the kind of visibility there is in the market today, 2003 is probably pushing it. “They probably won’t see any meaningful revenue until mid 2004,” he says.

Although Unters claimed that the acquisition won’t impede Corvis’s cash balance target for 2002 of $525 million, observers say that Dorsal, which has about $16 million in cash on its balance sheet to date, and which claims to have a burn rate of approximately $1.5 million per month, will increase Corvis’s expenses.

In response to the news, J.P. Morgan & Co. said today in a note that it had cut its rating on Corvis to Market Perform from Long-Term Buy. “Given the opportunity cost of this acquisition, as well as the capital-intensive and extremely competitive nature of the submarine market, we believe Dorsal may not have been the best move for Corvis,” analysts wrote in a research note.

In response to the announcement, Corvis stock fell 6.42 percent today, from 2.13 to 2.04 per share.

Not everyone thought Corvis had made a mistake. Rick Shafer, an analyst with CIBC World Markets, who helped put together the deal, says that, while the acquisition won’t bring in revenue immediately, it will definitely pay off in the future: “This is a natural extension of [Corvis’s] product portfolio. Especially its growing festooning business. I think undersea makes sense for them. There might not be a lot of contracts out there, but the ones [that are there] are very large.”

— Eugénie Larson, Reporter, Light Reading
http://www.lightreading.com

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photons-r-us
photons-r-us
12/4/2012 | 11:00:30 PM
re: Corvis Dorsal Deal: A Huber Spin-In?
Help me out here guys: Is there another case anyone can think of where a company aquired another company where the CEO was the chairman of both companies ? I am curious.

The new CFO of Corvis came from Optical Capital Group (the main investor of Dorsal) a few weeks ago. Anne Stuart resigned as the Corvis CFO a few weeks ago. Gee.. why do you think that was ?
photons-r-us
photons-r-us
12/4/2012 | 11:00:30 PM
re: Corvis Dorsal Deal: A Huber Spin-In?
This deal is so incestuous that it is absurd. I cant beleive that the board approved this scam !
To put the icing on the cake, I heard that the CEO of Dorsal used to be at Enron ! Hilareous (unless you are a Corvis stockholder).
fusionboy
fusionboy
12/4/2012 | 11:00:30 PM
re: Corvis Dorsal Deal: A Huber Spin-In?
Is it a surprise though - OCG, and all the other investors are looking to stay alive. Name one OCG company that actually has a good chance, I'll be nice here, a good chance for even a sweetheart acquisition. (hell it's 50/50 if Corvis has a chance!)

And - photons your right, to quote the Dorsal site:
Jim Bannantine joined Dors+íl in September 2001 as an established global business leader with eleven years of experience at Enron Corp in Europe, the United States and Latin America. Most recently, he served as CEO of Enron South America, where he developed and led a rapid growth strategy while holding complete P&L responsibility for a large division with $3.5 billion in assets, $1.5 billion in revenues and 4,500 employees.

Oh my - it get better by the hour!
fusionboy
fusionboy
12/4/2012 | 11:00:30 PM
re: Corvis Dorsal Deal: A Huber Spin-In?
Gee - Uncle Dave is starting to make Ken Lay sound like an honest upstanding guy. There's no way in hell he didn't have his hand in the pudding. Not only was he chairman of Dorsal - it was also funded by OCG his VC group. What other OCG companies are going to be folded in? Codeon - they've laid off 2/3s? Seneca? Unnamed companies in the wings. There's no way that Huber didn't have something to do with this.

Cooking something over my steaming rage
HarveyMudd
HarveyMudd
12/4/2012 | 11:00:28 PM
re: Corvis Dorsal Deal: A Huber Spin-In?
It is hard to imagine that Corvis would not act in the best interest of its shareholders. Mr. Huber should leave Corvis for ethical violations.
duncansfree
duncansfree
12/4/2012 | 11:00:27 PM
re: Corvis Dorsal Deal: A Huber Spin-In?
Eventhough I'm long Corvis, I'm pleased the article appeared. It certainly serves both, as a voice for the legitimate concerns of shareholders, and as a graphic reminder to Huber that his actions are now subject to criticism, even suspicion, by the street.

Such an atmosphere probably hastens the day when Huber will resign his CEO position, a move very much in the company's best interests.

Dunc
jssreenath
jssreenath
12/4/2012 | 11:00:26 PM
re: Corvis Dorsal Deal: A Huber Spin-In?
Great for Dorsal, bad for Corvis. Ask Tycom, they served the undersea market exclusively and after a much touted IPO in 2000, they were unceremoniously and quietly absorbed back into Tyco because they were failing.
switchrus
switchrus
12/4/2012 | 11:00:25 PM
re: Corvis Dorsal Deal: A Huber Spin-In?
Spot on!

How many new submaine pipes are on the drawing boards right now?

I do beleive that there are studies showing less than 10 percent load on some pipes now, and lots of companies are looking at how or if they can retro existing pipes to 10 G, at low cost.

Growth in this market is very low.
surveyor
surveyor
12/4/2012 | 11:00:22 PM
re: Corvis Dorsal Deal: A Huber Spin-In?
CFOs typically don't just leave, and not from a company like Corvis with options out the kazoo... unless they are ethical and won't play that game..
erbiumfiber
erbiumfiber
12/4/2012 | 11:00:20 PM
re: Corvis Dorsal Deal: A Huber Spin-In?
OK, what I don't understand is that Pedersen, CTO of Dorsal and former Corvis employee (Tycom too for that matter) is allowed to leave Corvis and even given funding to start this company, this in an industry where non-compete agreements are widespread (and often such agreements take a broad view of what technology "competes"- like DWDM broadly defined).

To me, this would be like Ciena giving money to start Corvis and then buying Corvis back (the kind of think that happens when hell freezes over).

Although technology-wise it makes a bit of sense since ultra-long haul is well suited for underseas systems but, as GX proved, underseas is not the hottest market right now...
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