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

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.
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
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