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Optical Valuations Take a Hit

Light Reading
News Analysis
Light Reading
5/23/2000

As the market for technology stocks gets bleaker by the minute, it's time to assess the damage. Although optical networking stocks have held up better than most technology issues in the deepening bear market, valuations are taking a hit on both the public and private side. For example, since the peak of the tech markets in March, Cisco Systems Inc. http://www.cisco.com (Nasdaq: CSCO) has lost 37 percent its public value, Nortel Networks Inc. http://www.nortelnetworks.com (NYSE: NT) stock is off 33 percent, Sycamore Networks Inc. http://www.sycamorenet.com (Nasdaq: SCMR) shares have dropped 60 percent, and Ciena Corp. http://www.ciena.com (Nasdaq: CIEN) has lost 37 percent of its public valuation.

"Many of the public companies have had their valuations cut in half in the last six weeks and on the private side we are seeing a compression of 20 percent to 30 percent for the later-stage companies," says Conrad Leifur, an analyst with U.S. Bancorp. Piper Jaffray Inc. http://www.piperjaffray.com.

This means a private optical networking company valued at $100 million six weeks ago is likely to be closer to $70 million at this point.

Optimists might note that in a ruthless technology market that has wiped out as much as 80 percent of the value of some consumer Internet companies, networking companies have held up quite well.

Leifur says the "acquisitive nature" of companies such as Cisco, Nortel, and Lucent http://www.lucent.com (NYSE: LU) will continue to support the valuations of smaller companies. He also notes that newer companies such as Sycamore are likely to start playing the acquisition game. He points to Nortel's recent acquisition of Coretek for $1.3 billion and Cisco's acquisition of Qeyton Systems for $800 million. "These company's are still at least a year away from having products," says Leifur.

The optical sector is also holding its own in the Initial Public Offering (IPO) market. For example, last week, New Focus http://www.newfocus.com (Nasdaq: NUFO) more than doubled in the public markets after issuing 5 million shares at $20. On Tuesday night, Goldman Sachs was expected to price 8 million shares of ONI Systems Inc., a Kleiner Perkins Caufield Byers http://www.kpcb.com funded startup that had no lack of interest even in Nasdaq losses deepened on Tuesday. If the price of ONI's stock rises to $50 in the aftermarket, it stands to have a market capitalization of about $6 billion.

At least one skeptic notes that ONI's valuation, which is unlikely to exceed $10 billion, is drawing questions about the huge valuations bequeathed upon earlier public-market entrants such as Sycamore Networks.

"ONI is coming out much cheaper than Sycamore," says Stephen Lacey, editor of the IPO Reporter, a newsletter owned by Thomson Financial http://www.thomsonfinancial.com. "It's a me-too company. But there's not as much value in owning Sycamore anymore; the valuations are being called into question."

At Tuesday's closing price, Sycamore had a market valuation of $18 billion.

--R.Scott Raynovich, Executive Editor, Light Reading http://www.lightreading.com

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