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Optical/IP

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
http://www.lightreading.com
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.

Flanker



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.

LB
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.

Dunc
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!

Z
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...
zipple 12/4/2012 | 10:59:56 PM
re: Corvis Dorsal Deal: A Huber Spin-In? Lightwoman, Lightbeating, et al.

How many other deals like this do you think are lurking in the wings? Not just of Corvis, but other companies as well?

It was a popular tactic during the bubble when the stock was cheap, so I wonder how many more will follow through to the liquidity event.
whatever 12/4/2012 | 10:59:57 PM
re: Corvis Dorsal Deal: A Huber Spin-In? Originally posted by switchrus

Spot on!

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

POSTED BY ME: Do you even know the topic that you are speaking on? 10% load on some pipes? Thats like saying 10% of load on some land fiber equals the fact that NO MONEY can be made in the telecom industry this year. What a schmuck!
LightBeating 12/4/2012 | 10:59:58 PM
re: Corvis Dorsal Deal: A Huber Spin-In? Lightwoman,

That makes a lot of sense. It confirms my feeling that Corvis could have done that R&D in-house, had they wanted. But doing it that way, both Pedersen and Huber win big (more Corvis shares for everyone), and the shareholders pay. That's of course assuming that something will come out of it, or of Corvis altogether.

I just don't think it's right for a CEO to play with shareholders money that way. We've given him $1B to build a business, not to buy new fancy toys...

LB
lightfax 12/4/2012 | 11:00:00 PM
re: Corvis Dorsal Deal: A Huber Spin-In? I really don't understand. I was expecting a report on Santel B-round funding.
Lightwoman 12/4/2012 | 11:00:02 PM
re: Corvis Dorsal Deal: A Huber Spin-In? Light Beating,

You're dead on. As for your first question, Bo never really left. Huber came and told him, I'm going to spin out the stuff your doing to another ocg company, you get a bigger title, more equity, and you move half mile down the road. That's all.
salsa 12/4/2012 | 11:00:05 PM
re: Corvis Dorsal Deal: A Huber Spin-In? Montiano says:
"Timing:
I'm not so sure that this is not the right time to make acquisitions. If you wait for the capex to pick up again, then you are facing the risk of being late, especially if you consider that acquisitions usually take some time to run smoothly. Secondly, making acquisitions when demand for optical gear kicks in could be much more expensive, instead of making it when every single person is saying that all-optical is now almost dead (and in fact is)"

SALSA SAYS:
I totally agree. It is interesting that we have heard a few acquisitions in the last few weeks, after a long long gap. At least some companies seem to believe that the worst is over. Huber probably has a good plan about what to do next. could even be part of an ongoing collaboration just becoming official.


MONTIANO SAYS:
Business Plan:
It is possible that Corvis' management is implementing a business plan focused on taking the leadership for the long-term on all-optical networks from A to Z, which means under-sea, terrestrial long-haul and terrestrial metro (Seneca Networks next target???) offering future customers a complete package.

Considerations:
As I said before I'm not an expert in this field and I do not have any knowledge in any company, so I'm following with great attention the debate of Corvis' acquisition. Huber's role in all this is not clear to me: some people paint him like a technical genius, but uncapable of doing anything else; some other say that he is not even good in technical matters, then he is treating employees like idiots ....

SALSA SAYS:
You are right and wrong. He (probably) is a genius of optics (only part of the technical expertise required to make the company a success), but this does not make him a genius in networking, or manufacturing. Still, my feeling is that this acquisition is not an unplanned, random action. I expect/hope to hear some good news from Corvis some time soon (not during the next CC though).
LightBeating 12/4/2012 | 11:00:06 PM
re: Corvis Dorsal Deal: A Huber Spin-In? Lightwoman,

Why would Bo Pedersen have left in 2000, when share price was $60+ ? Corvis was the hottest stock on earth at that time. Everybody was a gazillionaire. I don't get it. But I would understand that he felt he did not have a place at Corvis. 2000 was the year when R&D at Corvis started falling apart: too many people, too much money, too little management.

What I don't like about that deal is it's still just too much about cool technology, and the value proposition to customers (if they actually do exist) is very murky.

Everything about what Corvis does is just about cool technology. They (Huber) can't seem to be able to move away from being a technology company to being a business, focusing on making their customers happy and getting new customers.

Faced with a business decision, eg. will we make such component in-house or outsource it, Huber will decide: we keep making it in-house, because I like it. Never mind that it's going to cost less if I outsource.

When the time comes to develop a switch, are they listening to what customers want? I don't see them lining up at the door, waiting for the OCS. Will this be another case of too much, too early?

It's high time that this company gets itself a new CEO, and starts seriously thinking about making money.

LB
duncansfree 12/4/2012 | 11:00:07 PM
re: Corvis Dorsal Deal: A Huber Spin-In? Was Dorsal little more than a "dodge" to allow Corvis to offer some sub-sea while shielding company from non-compete agreements signed by Pederson and others?

Dunc

BTW....Of course, it may just have been planned as Huber's next "pot 'o gold" until sector financing and overcapacity realities overwhelmed it.
Montiano 12/4/2012 | 11:00:09 PM
re: Corvis Dorsal Deal: A Huber Spin-In? Hello everybody (sorry for my english, but it is not my mothertongue),
I'm not a technical expert for what concerns optical stuff, but I would like to share some opinions with you as a private investor:

Timing:
I'm not so sure that this is not the right time to make acquisitions. If you wait for the capex to pick up again, then you are facing the risk of being late, especially if you consider that acquisitions usually take some time to run smoothly. Secondly, making acquisitions when demand for optical gear kicks in could be much more expensive, instead of making it when every single person is saying that all-optical is now almost dead (and in fact is)

Business Plan:
It is possible that Corvis' management is implementing a business plan focused on taking the leadership for the long-term on all-optical networks from A to Z, which means under-sea, terrestrial long-haul and terrestrial metro (Seneca Networks next target???) offering future customers a complete package.

Considerations:
As I said before I'm not an expert in this field and I do not have any knowledge in any company, so I'm following with great attention the debate of Corvis' acquisition. Huber's role in all this is not clear to me: some people paint him like a technical genius, but uncapable of doing anything else; some other say that he is not even good in technical matters, then he is treating employees like idiots ....

I always try to base my investment decisions on facts (70%) and sensations (30%), and my opinion is that an investment in Corvis is for the very long run ... therefore I think it is worth it to give the guys at Corvis a chance.

Any comments?

Thank you all for your messages .... they are very instructive.

Best regards

Montiano

Lightwoman 12/4/2012 | 11:00:11 PM
re: Corvis Dorsal Deal: A Huber Spin-In? lots of misconceptions here.
dorsal has no customers. it's just a R&D subgroup from corvis spun out about 18 months ago, when guys were threatening to leave to other startups. basically all they do is make amps for undersea networks (an undersea version of the corvis terrestrial system, and who needs either of them). pedersen has been an erbium amp guy for years. look at the bios and put 2 and 2 together. it's a fully owned huber company so he's just doing administrative stuff, like moving cash from one checking acocunt to another. the reality is that dorsal can't stand on its own, the guys can't go to other startups now, so they're back to being an R&D subgroup at Corvis and dealing with the politics there without having to worry about balance sheets and such things.
as for huber being a nice honest guy, those of us in the know have a wry smile when we read that.
BenGrahamMan 12/4/2012 | 11:00:16 PM
re: Corvis Dorsal Deal: A Huber Spin-In? okay, I'm confused...... this is wierd and seems to me there should be a discussion by management. also, if you notice rick shafer from cibc put the deal together. If you look at my last cc notes

http://briefcase.yahoo.com/rbc... , you will see that I discussed Shafer's unusual comments at the call.

time will tell. I have heard that Huber is a nice honest guy. what gives here.

Lastly , Hi erbium fiber !!!! good to see you again.

peace,

bgm
erbiumfiber 12/4/2012 | 11:00:17 PM
re: Corvis Dorsal Deal: A Huber Spin-In? Wow.
zipple 12/4/2012 | 11:00:18 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...

_____________________________

I think that's why Eug+¬nie chose 'spin-in' for the title. Let's say a company wants to begin research for product X. In 2000, the job market was really tight, so starting X is difficult because you can't land the talent. So you convince somebody who is in the mood for doing a startup that you'll help him do a startup, and you'll take a piece of the company. You offer to spin in the new company to the mother company if X makes its milestones.

Why does this work? Because (back then) one time aquisition charges are OK to the street, but starting the research for the product inside the company show up as a loss against earnings.

There is an SEC rule that must be obeyed: the mother company can't own more than 20%, otherwise it must be disclosed publicly at the outset.

Nice work if you can find it.

-Z
donethat 12/4/2012 | 11:00:18 PM
re: Corvis Dorsal Deal: A Huber Spin-In? And why shouldn't it be a good deal for Corvis??? After all it's all under the Optical Capital Group umbrella...Dorsal (formerly Sowilo networks) is in the same building as OCG. Anybody that thinks otherwise should not be investing in this arena.
Half-Inch Stud 12/4/2012 | 11:00:18 PM
re: Corvis Dorsal Deal: A Huber Spin-In? Corvis just bought themselves a customer...it's Peter paying Paul. We can all see that.

Dorsal receives revenues for their undersea pipes. I find the assumption of revenue growth to be a long-term shot for undersea. Good deal for Corvis & great deal for Dorsal.

Meanwhile, back on the land, we can see that Cable has been kicking the Telco and Metro-Dataco industry across the states. The landline revenue-growth is questionable at best.

D. Huber and his Amputee buddy Terry Unter have a plan that matches their core strengths.

Glad to be on the sidelines.

H.I. Stud
ksig25 12/4/2012 | 11:00:19 PM
re: Corvis Dorsal Deal: A Huber Spin-In? There is a non-compete issue at Dorsal right now, specifically between them and Tycom. Not too much has been mentioned about that.
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...
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..
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.
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.
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
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.
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 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 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 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
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