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Is Sycamore Sniffing Around Sorrento?

Light Reading
News Analysis
Light Reading
12/28/2000
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Sycamore Networks Inc. (Nasdaq: SCMR) is in negotiations to buy another optical networking vendor, according to several Light Reading sources. The company is talking to a number of vendors, but the most likely acquisition target could be Sorrento Networks Inc., they say.

Why would Sycamore want to buy Sorrento? Not chiefly for its line of metro DWDM products. But Sorrento does have two things that Sycamore would like: revenues, and heavyweight customers.

There's another reason why the deal could happen: price. The market cap of Osicom Technologies Inc. (Nasdaq: FIBR), Sorrento's parent company, is now only $148 million. That's not much more than some optical networking startups receive in funding. Further, it's a tiny fraction (1/36th, to be precise) of the $5.04 billion market capitalization of ONI Systems Inc. (Nasdaq: ONIS), one of Sorrento's main competitors and another possible acquisition target.

In other words, Osicom/Sorrento's low, low valuation may present Sycamore with an opportunity to snap up a bargain.

Ironically enough, right now the largest impediment to such a deal going through is Sycamore's own stock price: currently trading at around the $40 mark, off a high of $200 earlier in the year.

"I know they [Sycamore] were shopping to do something by year end. That's obviously not going to happen now," says a VC, who spoke anonymously. "They'll have to wait for a January rally before doing anything."

Despite a few rough spots this year -- which included staffing problems and an aborted attempt at an IPO -- Sorrento has done an impressive job of building up its customer base. According to the last 10-Q filing by Osicom, Sorrento shipped products to eight customers during the three months ending October 31st.

Most recently, it signed a $40 million deal with Cox Communications Inc. (NYSE: COX) (see Sorrento's $40 Million Deal). Other customers include major players like AT&T Broadband, Inrange Technologies Corp., and United Pan-Europe Communications NV (Nasdaq: UPCOY).

Light Reading also has learned that Sorrento recently signed a major deal to supply DWDM (dense wavelength-division multiplexing) equipment to TeraBeam Corp. -- an optical wireless, or "free space optics," outfit (see Wireless Wonders). Sorrento has reportedly not made the deal public because Terabeam is backed by Lucent Technologies Inc. (NYSE: LU), a competing DWDM manufacturer. According to Light Reading's source, a vice president at a financial information and services company who requested anonymity, the deal is worth "$250 million over the next three to five years."

Sorrento's revenues are starting to ramp up. In the three months ending October 31st it reported $7.1 million, compared to $3.5 million in the preceding quarter -- a 103 percent increase. Osicom's newly appointed president and COO, James Dixon, stated in the Q3 earnings call that Sorrento would grow 40 percent for the next quarter. "It's a no-brainer that we are going to do triple-digit growth in sales next year," he claimed. (Dixon represents another positive for Sorrento, bringing a level-headedness and professionalism to his new gig that some Osicom shareholders said was sorely missing from previous administrations (see Osicom Investors Rebel).

It's worth noting that customers and revenues are two things that Sycamore did not immediately get from its acquisition of Sirocco Systems, the company that it bought in June for $2.9 billion when it had neither product nor customers.

In fact, if the deal goes through, it will stand in stark contrast to Sycamore's Sirocco purchase -- something that bothers some observers. "This strikes me as a really bizarre move," says Scott Clavenna, president of PointEast Research LLC and director of research at Light Reading. "Buying Sirocco gave Sycamore a great company, with a great team that had the same mindset. You can't say any of that about Sorrento. I can't imagine Wall Street liking this deal much."

Sorrento and Sycamore declined to comment.

-- Stephen Saunders, US Editor, and Marguerite Reardon, Senior Editor, Light Reading http://www.lightreading.com

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lightreader
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lightreader,
User Rank: Light Beer
12/4/2012 | 9:03:07 PM
re: Is Sycamore Sniffing Around Sorrento?
hmmm..seems like sorrento folks wrote the
policy control spec for the ODSI framework...
a SYCAMORE launched initiative...so much for
the mindset issue.....this is part of the
ODSI standard now....
Techhead
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Techhead,
User Rank: Light Beer
12/4/2012 | 9:03:04 PM
re: Is Sycamore Sniffing Around Sorrento?
Glad to see that you are beginning to see the "Light" of Sorrentos' merits. Major companies have noticed them and that is a trend I expect to continue. You are to be applauded for showing that you can report the "good" as well as the "bad" (even though the bad was never proven, only personal opinion). Keep up the reviews of this company...this really got your name out in the public! Let's hope the switch mentioned in the previous posts is as good as everyone thinks. Any ideas who is testing it? The Terabeam news is certianly welcome. Any more news about it?
pingu
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pingu,
User Rank: Light Beer
12/4/2012 | 9:03:03 PM
re: Is Sycamore Sniffing Around Sorrento?
I'm curious to learn what's not to like about Sorrento's metro DWDM products. I would also like to hear anyone's thoughts on the growth of metro DWDM over the next 3-5 years.

I read an article in 123jump.com discussing lasers which implied that there will be very strong growth in metro DWDM:

http://www.123jump.com/story.h...

Here are the relevant excerpts, with my emphasis in all caps:

"The prime argument pointing to 2001 as the beginning of a significant upGă˘trend in the market for lasers is not only the continued buildGă˘out of longGă˘haul and submarine networks G㢠thus far the predominant reason for investing in SDL Inc. G㢠but also AN EXPECTED BREAKTHROUGH OF DWDM TO THE METRO-NET LEVEL.

Due to the high cost of DWDM gear, and the time consuming SONet configuration process, metro DWDM spending has been limited. ECONOMIES ARE NOW TILTING VERY MUCH IN FAVOR OF DWDM AS BEING THE MEDIUM FOR METRO-FIBER CAPACITY EXPANSION.

The figures relating to 'lit' and 'unlit' fiber could be misleading indicators of whether or not capacity demands require DWDM as a pervasive standard in metro rings. Unlit fiber, or excess capacity, isn't always in the place where capacity is required. Certain metro routes are saturated G㢠regardless of whether Ameritech or SBC have 'lit' less than 20% of their fiber.

Implications for the local access provider have become clear: in comparison with the alternatives for boosting capacity on crowded routes, DWDM REPRESENTS A SIGNIFICANT COST ADVANTAGE."

Thanks and regards,
pingu
Techhead
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Techhead,
User Rank: Light Beer
12/4/2012 | 9:03:01 PM
re: Is Sycamore Sniffing Around Sorrento?
The Dell'Oro group and RHK think spending is about to move up significantly (in metro DWDM). As to what is not to like about Sorrentos' equipment, I am not the person to ask, nor is AT&T, UPC, INRANGE, COX, Duetche Telecom, Time Warner, Southern Calif Edison, TXU Communications RWSO, Pontio or Progress TeleCOM! They all use the stuff!
Kaarthavarayan
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Kaarthavarayan,
User Rank: Light Beer
12/4/2012 | 7:15:55 PM
re: Is Sycamore Sniffing Around Sorrento?
I think you folks are being too negative about Sorrento. If they were the turd you make them out to be how come AT&T Broadband, Cox Communications, Terabeam (rumored), UPC, Inrange, and others would trust them with their core and access networks?

You guys seem to put too much weightage on the power games and the flimflamglam of this industry. Remember jocks from High School rarely become CEOs, surely not Bill Gates, and the prom queens do not exactly become famous and successful either. So try to be a little less superficial por favor.

Sorrento is valuable bcos they have a product that does not conflict with anyone's architecture and that is upgradeable in the future without having to tear everything down. The cable guys are going to be pretty decent customers from 2001 onwards since they will get their finances in order for the expansion.

Cisco smartly is preparing for this, Nortel seems to be on the alert too. But Sorrento definitely was the first to get their business. They would benefit from having a larger partner so they can keep the customers from getting taken by the competition with bigger bucks.

It would help a Sycamore or Lucent or Nortel to buy a good Metro Optical Networking company which is well suited for an all-optical next gen network. Sorrento with their Gigamux and soon to be released Teramatrix is well positioned to do exactly that. If Lucent is smart they will pick Terayon for cheap and get into the CMTS end of things and Sorrento and get into the Metro ON end of things. After that, it is up to them to grow that base into a credible, inter-operable, Mesh Networks that pretty much spans both costs in the US, and all of Europe without Ultra-Long-Haul in 80% of the network. The latter will be used in specific segments where the distances are meaningful.

The ULH guys were valued in the 3-4 billions, but the Metro guys with their passive device will have a HUGE market in the core, access and Enterprise. So the value is there, only the myopics have yet to put their glasses on and see it. They will soon and will sing a different tune.

FWIW, Sorrento's management past is checkered to say the least, but companies sell products not managers, so I cannot complain as long as they are selling products and growing. I expect to see articles from everyone soon about how having Managers and big names alone are not enough, we need revenues, sales growth, etc... This is already happening in the dotcom world, it will come here too... We will be watching.
KathrineHarris
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KathrineHarris,
User Rank: Light Beer
12/4/2012 | 7:15:55 PM
re: Is Sycamore Sniffing Around Sorrento?
Lightreading....be specific about your sources...
KathrineHarris
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KathrineHarris,
User Rank: Light Beer
12/4/2012 | 7:15:55 PM
re: Is Sycamore Sniffing Around Sorrento?
HLIT is, STLW is.

Now is time to add a Metro DWDM player.

Steve Saunders
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Steve Saunders,
User Rank: Blogger
12/4/2012 | 7:15:53 PM
re: Is Sycamore Sniffing Around Sorrento?
yes, I noticed that also. Scott Raynovich, who runs the LR index, is going to pop in later and tell us why they are not listed.

--Steve
Steve Saunders
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Steve Saunders,
User Rank: Blogger
12/4/2012 | 7:15:53 PM
re: Is Sycamore Sniffing Around Sorrento?
Are you reading the same article as me?

I thought the tone of the article was positive.

--Steve
Steve Saunders
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Steve Saunders,
User Rank: Blogger
12/4/2012 | 7:15:53 PM
re: Is Sycamore Sniffing Around Sorrento?
We occasionally need to protect our sources. Providing anonymity for our sources, where appropriate and warranted, has allowed us to break the stories about the LU/Chromatis, Sycamore/Sirocco, and Ciena/Cyras acquisitions.

We're not planning to change this policy.

Steve
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