Is Sycamore Sniffing Around Sorrento?
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