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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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Kaarthavarayan
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Kaarthavarayan,
User Rank: Light Beer
12/4/2012 | 7:15:50 PM
re: Is Sycamore Sniffing Around Sorrento?
Steven,

Sorry, it was a LOT more than semantic error in your article that people are justified in having a problem with. One just has to look at the previous articles you guys have written about Sorrento to see an obvious, undisguised negative bias.

While having a negative bias is not a crime, just do not insult our intelligence saying it was just mistaken impression caused by your choice of words. We may read lightreading regularly, but we are not THAT dumb! :-)

Do you think any of those fancy customers would be signing contracts with a shaky company like Sorrento if all they were selling was low-value products? And if SCMR just wanted the customers, for a few million dollars of marketing push they could easily get them to look at SCMR products, ... which in this case are ...? Ah, so maybe the products DO matter! You and your cohorts at Litereading may not like them, but the customers do like those products enough to pay money to put them on their networks it seems.

And what's more your "analysis" ... geeze folks, are you trying to commit professional suicide here or what? Here's the analysis: Sorrento looks like a good buy since Osicom's share price has fallen quite a bit. But ... foot in mouth dance starts here ... Sycamore is balking at buying at these levels because SYCAMORE stock has been beaten down and this might be a problem. Hmmmm...

Here's what SCMR would be telling the Street today about buying FIBR (Osicom):

Today, SCMR = $40, FIBR = $13 (on 12/28 your article's date)
So for one SCMR share (theoretically) we get 3 FIBR shares.

If we rally, here's what the prices were in March 2000. SCMR = $200, FIBR = $149. (This was when SCMR was still lustrous from its glorious IPO, and FIBR had no major announced contracts, no All-optical switch in tests with customers.)

So in that case, 1 SCMR = 4/3 = 1.333 FIBR

Which is a better deal? 3 FIBR shares for 1 SCMR now, or 1.3333 or less after a rally?

What is more, SCMR is less likely to get to the $200 valuation, while FIBR is MORE likely to get to the $150 valuation based on present trends. So is it wise to act now or wait for the rally??? Either they need to buy or not buy. The price is better now for SCMR than for FIBR. It will not likely get better for SCMR, but very well could for FIBR, especially if Lucent, Cisco or Alcatel decide to join in and make it a little more work for SCMR who is a competitor eating into their target markets.

Don't you guys see that either analytical ability or objectivity or both are lacking in your article? I am not an "expert" in Finance or Optical Networking or industry trends, yet I can poke all these holes in your article. And these are not even esoteric details, these are FUNDAMENTAL facts!!!! Does not even require a calculator.

Finally Scott Clavenna ... what a gem. Sirocco has no customers or revenues. Sorrento has customers and growing revenues, and a futuristic product portfolio. Sirocco is obviously the right thing to have bcos they have the right MINDSET!!!? Pray what mindset is that? Telling a good story? Throwing a good party for analysts? Forming Advisory Boards with big names? Giving little gifts and contracts to Analysts? Do tell do tell.

If you guys are REALLY smart, which you are showing lesser and lesser evidence of so far, you will come out with another list, not of movers and shakers, but of companies that have spent a nickel or more in entertaining any of you, in contracts for consultations and advice, any gifts or benefits of a material sort. It may not be legally required now, but it is only a matter of time before the law catches up with it. It is coming to the Analysts on the tube, and when some of the Optical Networking companies start collapsing people will want "answers" and they will ask those questions then.

You see guys, this is not a personal thing, I am just an individual investor in FIBR, and actually like reading lightreading for what used to be good articles and news reports. It is the quality of the analysis, which has been dropping that concerns me. While I do not expect New York Times standard, is tabloid the way to go? I hope not.

But if you want to be the National Enquirer or Sun or Daily Mirror of Optical Networking, do bear in mind those folks get sued a lot by some of the losers (and winners) they write about. It took "celebrities" a while to catch on to that. The Optical Networking nerds will too, sooner rather than later. We are not in High School anymore folks. Don't say you were not warned ahead of time. There are several millions riding on the startups you gossip about. When some of them start losing money, they will lash out at their critics. Just a matter of time. Playing fast and loose with facts is not the way to go. Slow down and check your facts, and your biases before you put finger to keyboard. As for first to report ... fools rush in ...

So, how much has Sirocco raised in revenue so far? How much will they in the next 3-5 years? How does it gel with what Sycamore paid for them?

Now look at the same thing for Sorrento. How much will they net in the next 3-5 years? How much do you think they can ask a Sycamore to pay for them? That is the starting point. Sycamore's stock price comes in long AFTER all of these issues are sorted out. It is that simple. Let's see how all of this plays out.
bardia
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bardia,
User Rank: Light Beer
12/4/2012 | 7:15:51 PM
re: Is Sycamore Sniffing Around Sorrento?
Still, the the fact remains; if Sorrento's products presented no advantage over it's competitor's, they would not have sowed-up the lion's share of the CATV business. Additionally, if their products were not superior to their competitors' then a leading-edge technology company such as Terabeam would not have selected Sorrento's products.

I think it is a bit naive to believe the primary factor for SCMR's (and other optical companies') interest in Sorrento is the customers. I believe, after some extensive DD in Europe and San Diego, that not only is Sorrento's product much more flexible, accurate, and of general higher quality than their competitors, but they have an ACE up their sleeve as well in their all optical wavelength switch/router which is currently being field tested.

Otherwise, your article was the most informative i've seen from a 3rd party for this company in a VERY long time. keep up the good work!

Greg
Steve Saunders
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Steve Saunders,
User Rank: Blogger
12/4/2012 | 7:15:52 PM
re: Is Sycamore Sniffing Around Sorrento?
Yes, that sentence is certainly open to misinterpretation, isn't it?

I was trying to make the point (badly, apparently) that while some companies are bought primarily for their technology, or products, in this case the primary motivation for a purchase would be the customer base -- no the products.

Steve
Steve Saunders
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Steve Saunders,
User Rank: Blogger
12/4/2012 | 7:15:52 PM
re: Is Sycamore Sniffing Around Sorrento?
There were three sources. And yes, they were certainly well placed.

Steve
B
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B,
User Rank: Light Beer
12/4/2012 | 7:15:52 PM
re: Is Sycamore Sniffing Around Sorrento?
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.

Isn't it true that without these products, Sorrento would not have these customers?

B

djf1970
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djf1970,
User Rank: Light Beer
12/4/2012 | 7:15:52 PM
re: Is Sycamore Sniffing Around Sorrento?
Can I take it from your reply that your source was well placed enough to warrant anonymity?
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
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.
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