Corvis Dorsal Deal: A Huber Spin-In?

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
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mbcorp 12/4/2012 | 10:57:57 PM
re: Corvis Dorsal Deal: A Huber Spin-In? Disclaimer: Individual Investor

A sign of strength in a weak market its the ability to make aquisitions and add value at a discount . This deal was made to exploit Corvis' new 'optical convergence switch'. The core market for the new product is the undersea carriers. Dorsal has great relations with these carriers. As Montiano states, they want to be the "first to market" as an all-optical global network.
flanker 12/4/2012 | 10:59:19 PM
re: Corvis Dorsal Deal: A Huber Spin-In? The spin that Corvis acquired Dorsal to fill out the product line in longhaul is believable. I am curious what sort of valuation huber bought into Dorsal, and then at what valuation he sold his interest. He probably made a tidy sum in a currency (CORV shares) that are admittedly going no where fast.

So what is Dorsal's product? An optical amplifier. Is that all? What about gain flatteners and branching units? Whose fiber do they recommend, and do they use SCF with dispersion shifted fiber, or just any old single mode fiber?

Also, these OA's are designed for 2 failures during their service life. Two! Typical failure rate is less than one failure FOR THE TOTAL CABLE over a cable's service life.


photons-r-us 12/4/2012 | 10:59:29 PM
re: Corvis Dorsal Deal: A Huber Spin-In? 280 Million shares is amazing ! Where did you get that information ? Corvis had 330 million shares at it's IPO, still in the optical networking craze era, and was soundly criticized for having too large a float. This number was after a 12:1 split ! (4:1 at the time of the IPO and an additional 3:1 earlier in the year). How were 280 million shares of Dorsal created ? Must have been a hell of a dilution. I suspect they were about to go under and Huber decided to rescue them. That way both companies will go down together. Again, I am amazed that board approved this. Shareholders Revolt !!!!!
LightBeating 12/4/2012 | 10:59:30 PM
re: Corvis Dorsal Deal: A Huber Spin-In? The Doc,

I don't mean to be rude, but I don't get it. 80M out of 280M, that's nearly 30% of the shares awarded to employees. That's actually quite a lot. That would amount to $30M divided into 100 employees, or $300K per employee. Sure, you're not a millionaire, but who said you deserved it? Joining a startup should not be a guarantee of becoming rich.

If you start a business, and you're succesful, then you deserve all the millions you can make. But just joining a startup as a regular guy, that should just get you a "regular" share of the pie. $300K is a reasonable bonus.

That was the grand illusion of the 90's: to get rich quick, whatever you did. Even secretaries and technicians would have millions. That insanity brought us where we are now. Lucky are the ones who benefitted from this madness and got out in time. For all the others, it's business as usual...

Neither Dorsal nor Corvis have been succesful businesses so far. Dorsal barely has a product being "evaluated" by potential customers (actually, they evaluate the "technology", not even the product!). Corvis has a handful of customers, who have all decided to stop placing PO's for the moment (and maybe forever...). It's got pitiful revenues, huge operating losses, and new products generating new revenues take a long time to come.

Profitability and growth are the benchmarks of a succesful business. So far, Corvis and Dorsal have got neither.

techbull 12/4/2012 | 10:59:31 PM
re: Corvis Dorsal Deal: A Huber Spin-In? What Corvis did 1 and half years ago pre IPO was reflection of demand for Corvis shares at that time. I remember that initial price was set at $15 and then ratched up to $36. It was nothing to do with Corvis but with CSFB doing a great job of promoting the shares and getting them out even before IPO.

What is happening now with this acquisition is reflection of how dorsal employees (regular joe blows like me!) are getting screwed.

Show me one private company which had so many shares outstanding and not even done thro' 4 rounds of financing.

Show me one. Even one which might be dead by now is acceptable.

Anyway I think regular dorsal employees got shafted with this deal just like Corvis employees.

The Doc.
duncansfree 12/4/2012 | 10:59:32 PM
re: Corvis Dorsal Deal: A Huber Spin-In? Would be more concerned with 4 for 1 split Corvis did on day of IPO.

As for Dorsal, 6 MM options will also carry over though without an acceleration in vesting schedule.

No immediate vesting.

techbull 12/4/2012 | 10:59:33 PM
re: Corvis Dorsal Deal: A Huber Spin-In? Did anyone here know that Dorsal had more than 280Million shares float !! (for a private company this is as egregious as some of the aggressive account. To be honest it is enronic!)

Out of 280M probably Bo and Execs owed 100M, Huber another 100M and all the employees 80M. So while employees thought they were getting shares out of there wazoo they were infact as diluted as my pee in Atlantic Ocean!

All that lure of shares for employees was just a big scam if u ask me!

Ponder that.

The Doc.
zipple 12/4/2012 | 10:59:33 PM
re: Corvis Dorsal Deal: A Huber Spin-In? You have made excellent points- yours is the single most insightful post I have read on any message board (ever)....


Gosh, gee willakers (sound of foot digging in dirt). :)

Seriously though, thanks for the comment.

Incidently, my personal favorite posts are from BenGrahamMan, who posts here, RB and The Fool. He produces consistently high quality information in just about every post, and collates a great deal of information into one place in that public briefcase of his. Thanks BGM!

donethat 12/4/2012 | 10:59:52 PM
re: Corvis Dorsal Deal: A Huber Spin-In? The other factor that may be in play here is that with Pederson given the green light to begin a start-up, he was more able to recruit more of his former team from Tycom (ie, offer them more of a stake in a new company, etc.) This was done in the timeframe where "everybody" was getting rich quick.
erbiumfiber 12/4/2012 | 10:59:54 PM
re: Corvis Dorsal Deal: A Huber Spin-In? You have made excellent points- yours is the single most insightful post I have read on any message board (ever). I'm on the technical/legal side of things (patents) but don't have the knowledge of finance and SEC rules that you obviously do. Yours is the only explanation that truly makes sense...
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