Is Sycamore Startup Hunting?
Could it be fishing for an acquisition?
“I haven’t heard that, but it might make sense,” says Jeff Lipton, research analyst with J.P. Morgan Chase Bank & Co. “Investors have been asking what they are going to do with all that money. Still, it’s hard to know in this kind of environment if keeping it in the bank isn’t the better idea.”
Sources close to the company say Sycamore officials have already spoken to over 50 startups and are in the process of evaluating many others. Two sources say the company has been in talks with both WaveSmith Networks Inc. and Crescent Networks Inc., both multiservice switch vendors based near Sycamore in Massachusetts. Other companies, such as Laurel Networks Inc., Quarry Technologies Inc., and Vivace Networks, have also been mentioned as possible acquisition targets. The company has also been rumored to be poking through the assets of Gotham Networks, which went out of business in June (see Gotham Networks, MIA).
Judging from the names that have popped up as possible targets, it seems as though Sycamore might be looking for an ATM-based multiservice switch for the edge. This could make sense, given the fact that Sycamore’s top brass has dabbled in ATM before. Dan Smith, Sycamore’s president and CEO, and Desh Deshpande, its founder and chairman, helped develop the ATM switch startup Cascade Communications into a $500 million, 900-person company. The company was acquired in June 1997 by Ascend Communications, which was itself later bought by Lucent Technologies Inc. (NYSE: LU). The original Cascade ATM switches have served as the basis for Lucent’s ATM offering and have pulled in a steady stream of cash for the company over the years.
Acquiring an ATM switch would certainly change Sycamore’s focus from pure optical to more networking, but selling ATM switches along with optical switches could be a good fit, given that Sycamore hopes to target more regional Bell operating companies (RBOCs). These carriers already use ATM in their networks and are in the process of upgrading those networks to the next generation of ATM switches, which include IP functions as well. These multiservice switches allow carriers to deploy ATM today and migrate to IP later (see Multiservice Switches).
Experts warn that if Sycamore is looking to acquire a startup, it had better be one with a working product and paying customers.
“This is a good time for bargains,” says Michael Howard, principal analyst and founder of Infonetics Research Inc. “But when Sycamore finally makes a decision on a company to acquire, they’ll be looking for more than good technology. They’ll be looking for someone with customers and viable margins.”
Three of Sycamore's potential targets -- WaveSmith, Crescent, and Laurel -- have already announced customers (see WaveSmith Wins Customer, Crescent Angles for the Edge, and Laurel Scores at Level 3). Still, that's no indication that any of these companies are gaining real traction.
Sycamore’s main problem right now is revenue. For the fourth quarter of 2002, the company saw revenue fall to $8.5 million, compared to $50.9 million for the fourth quarter of fiscal 2001 (see Sycamore Reports Q4). Its stock price has also fallen and is trading below cash.
The company announced a major reorganization in June, which will help it reduce costs (see Sycamore Switches Focus). It is getting rid of its transport business and focusing solely on optical switching, leaving it with two main products, the SN 16000 core optical switch and the SN 3000 metro optical switch. The SN 3000 was acquired from Sirocco for $2.9 billion in June 2000 (see Sycamore Gains Access).
The SN 16000 is supposed to be the most promising product in its portfolio, but it’s far from a cash cow. Sycamore has had some success, but Ciena Corp. (Nasdaq: CIEN) currently leads the market, and Lucent appears to be making significant headway with its LambdaUnite.
Overall, this market is hurting. Many of the interexchange carriers that might have been big buyers of optical switches are in financial trouble. RBOCs are clearly the next target market. Sycamore has already gotten its Osmine certification from Telcordia Technologies Inc., a basic requirement for being considered by RBOCs (see Sycamore Completes Osmine). And its newly announced partnership with Siemens AG (NYSE: SI; Frankfurt: SIE) should get its foot in the door with international incumbent carriers. But even market leader Ciena says RBOCs are at least a year away from deployments (see Ciena Follows the Incumbents). Ciena, which has already sold transport gear to a few RBOCs, has barely gotten its CoreDirector into RBOC lab trials.
Simon Leopold of Merrill Lynch & Co. Inc. said that he doesn’t see any near-term revenue opportunity in a note published last week, after the company announced its quarterly earnings.
An acquisition might help, but even if Sycamore found the perfect startup -- one that could provide it with instant revenues -- J.P. Morgan’s Lipton says that it still may not be the best strategy for the company.
“Sycamore has two priorities right now: getting incumbent traction with the SN 16000 and cutting operating expenses,” he says. “Acquisitions should be a distant third. The climate just isn’t right. This downturn is going to go on a lot longer than people think. I don’t see a lot of M&A activity in the near future.”
Sycamore declined to comment on this story.
— Marguerite Reardon, Senior Editor, Light Reading