Is Sycamore Startup Hunting?

Sycamore Networks Inc. (Nasdaq: SCMR) is sitting on over $1 billion in cash with no debt. And it's rumored to be talking to a slew of edge switching startups.

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
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optigirl 12/4/2012 | 9:50:51 PM
re: Is Sycamore Startup Hunting? I'm sorry but given this company's track record on Start-ups I can't see how the shareholders should feel about spending any more.


This is a subscription pay but the comments from the Service Providers on Sycamore were pretty rough.

Or how about this one from Desh on the Sirocco purchase:

As far as the price of the deal--$2.9 billion--Deshpande said he thought it was a fair price. "You want to make a good deal so that everybody feels good," says Deshpande. "You don't want to make it a steal, but you also don't want to overpay. It's all a question of how much revenue you acquire. The extent to which you think they can add fuel is how much you pay."

http://www.lightreading.com/do... Sycamore gets into 40G (With a plug from Mr. Clavenna.....How's that 40G market doing Scott???)

lilgatsby 12/4/2012 | 9:50:49 PM
re: Is Sycamore Startup Hunting? Optigirl, you seem to know a bit about Dan & Desh's previous activities. Maybe you can answer this one:

How many of Sycamore's accounts are the result of directed shares and how many are legitimate wins?
I'm just wondering if they had not made such common practice of doling out shares, would they have the war-chest they sit on today? How many of their "customer-shareholders" are still in business, I guess we can scratch Enron & Wcom from that list...

optigirl 12/4/2012 | 9:50:48 PM
re: Is Sycamore Startup Hunting? Sorry but I don't have that information off the top here. I just read the article this A.M. did a search on LR for old articles and I had read the CIR report on Sycamore and Corvis. (Funny read....the analysts were basically saying that both CORV and SCMR should do the right thing and give the shareholders their money back instead of acting like banks who make money on their interest)

The key for them was Williams. Their contract gave some air of legitimacy to the company and helped fuel their Wall St. hype.

Desh and Dan eschewed OSMINE and paid the price for it. They should have known better from their past experiences at Cascade where they sold a ton of equipment to the Bells. I certainly cannot fault them for trying to launch a company and picking off weak SPs to get some sales was a good move at the time. my point was they stink at buying companies and should be accountable for their choice. Tell me that Sirocco was not an instance of keeping it in the family. They bought out Reeves et all when they ran Sahara.
consultant13 12/4/2012 | 9:50:46 PM
re: Is Sycamore Startup Hunting? All this talk of acquisitions....hmmmm - Kevin, we see you behind this.
Vesting 12/4/2012 | 9:50:45 PM
re: Is Sycamore Startup Hunting? Wasn't the Sirocco box supposed to be an mulitservice switch with ATM switching and IP routing capabilities? Have they done anything with the Sirocco technology?

I think I would agree that they should just give the shareholders their money back. Sycamores transport products are a dog as I see it. The Williams deal had Matthew Bross directed shares all over it. Desh and Dan did it once. I doubt they can do it again.

sigint 12/4/2012 | 9:50:41 PM
re: Is Sycamore Startup Hunting? Desh and Dan did it once. I doubt they can do it again.
You're right, they can't. You can't fool all the people, all the time.

A new generation of suckers has to emerge for these guys to hit the jackpot again.
light-headed 12/4/2012 | 9:50:40 PM
re: Is Sycamore Startup Hunting? Cascade was a great engineering company with great products and Dan and Desh should be proud of that but Sycamore represents everything that was wrong with the bubble economy.
shadowandlight 12/4/2012 | 9:50:38 PM
re: Is Sycamore Startup Hunting? Vesting:

I think I remember hearing about ATM being available on the Sirocco box at their booth at Supercomm 2000. Didn't hear anything about it after that, though. Anyone know if that product still exists? It's not on the Sycamore website anywhere.

I never heard of it doing any IP routing.


I doubt the Sirocco box is done at SCMR. Think about it - they've cancelled the 6000, 8000, 10000, but not the 3000. And they just came out with a quad GigE a month or so ago for the 3000. They may keep that one for a while longer.

"Only the Shadow knows..."
tet109 12/4/2012 | 9:50:38 PM
re: Is Sycamore Startup Hunting? The Sirocco product is done at SCMR. I think correct and SCMR better spend some money to get a technology other than rely on core optical products and hope and pray that provisioning and management software sell their product like it did work for Cascade otherwise SCMR die a slow death over many years until their $1B is gone. Common sense would send SCMR to the access market. But Wavesmith ? ATM edge switch is all WaveSmith do. SCMR should look at optical access companies. To bad they never got Sirocco to work I think it was right idea.

BobbyMax 12/4/2012 | 9:50:23 PM
re: Is Sycamore Startup Hunting? Sycamore appears to be just fishing around. If Sycamore wanted, it could have bought its share back. But Sycmore does not have any faith in its own products.

Deshpande would not spend any money on acquiring any company. The One billion dollar in cash is reserved for severance pay and personal payments should Sycamore fold.

Many of its management employees have sold their options and shares, so the money in the bank is just for the rainy days should the company fail.
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