Siemens, Alcatel Seeking Sycamore?
The likely contenders? Siemens AG (NYSE: SI; Frankfurt: SIE) and Alcatel SA (NYSE: ALA; Paris: CGEP:PA).
Sycamore has been rumored to be talking to Siemens for some time, although nothing concrete has come of those talks. But one reliable source says the dealmakers have recently been working overtime, and that the ink could be dry on the term sheet as early as this week. He said a deal could be announced in conjunction with the Supercomm 2002 trade show in Atlanta.
As potential suitors, either Siemens or Alcatel would make sense, since each of those companies could use a large optical switching product or, more importantly, the accompanying provisioning software for which Sycamore is known. Sycamore’s ON16000, a 512-port OC48 switch with STS1 grooming capabilities, recently started shipping and may indeed be the product that Siemens or Alcatel could use to attack Ciena Corp. (Nasdaq: CIEN), the company that’s had the most recent success in the STS1 grooming optical switch market.
Siemens recently let it slip to Light Reading that it was negotiating a deal to resell another vendor's grooming switch (see Why Siemens Sold Unisphere).
For Sycamore, having a deep-pocketed partner that has good relationships with large carriers would be helpful. In many cases, optical switching startups have had difficulty selling their early products to large incumbent carriers and are now seeking partnerships with larger resellers that can help deliver their gear into the hands of the largest customers.
One big question about such a deal is the price. In the current environment, it’s unlikely that a large equipment provider would pay a big premium over Sycamore’s current stock price -- which currently puts it in the range of $1 billion. Sycamore’s sales slump has shown little signs of improving, and the company has recently focused on reducing its head count and preserving its cash (see What's to Save Sycamore?).
Despite all of the logic that might drive such a deal, though, there are also some reasons why Sycamore officials might have reason to drive a hard bargain. Sycamore has roughly $1 billion in cash and investments. And the company has recently reduced its burn rate to less than $30 million per quarter, showing it has the resources to improve its products and potentially outlive the telecom slump. Sycamore chairman and founder Desh Deshpande and CEO Dan Smith have been reluctant to sell, even in these bad times.
Such factors left some Wall Street sources skeptical of the talk.
“I wrote it off for two reasons -- I hadn’t heard anything, and the stock is rolling back down,” says one fund manager who asked not to be named. “It never mounted a head of steam. One thing they have is cash, so it doesn’t make any sense, in that they can at least roll out product and wait until the industry picks up. I can’t imagine they would sell without a premium.”
The markets, so far, seem to agree. Sycamore stock was trading down $0.14 (3.90%) at $3.45 at midday on Monday.
Alcatel and Sycamore declined to comment on this story. And Siemens was unavailable for comment at press time.
— R. Scott Raynovich, US Editor, Light Reading