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Sycamore Gains Access

Light Reading
News Analysis
Light Reading
6/6/2000

ATLANTA--As one optical networking executive said at the Supercomm trade show: "What took them so long?"

The executive was referring to Sycamore Networks Inc.'s http://www.sycamorenet.com $2.9 billion acquisition of privately held Sirocco Systems http://www.siroccosystems.com, announced today.

People have been waiting to see what Sycamore (Nasdaq: SCMR) would do with its sky-high stock price. Since last fall, when it went public, the company has been waiting and watching as players such as Cisco Systems Inc. http://www.cisco.com (Nasdaq: CSCO), Lucent Technologies, Inc. http://www.lucent.com (NYSE:LU) and Nortel Networks http://www.nortel.com (NYSE:NT) snapped up optical networking startups.

Rumors that Sycamore was about to make an acquisition reached fever pitch last week, when Light Reading reported that Sirocco and Alidian Networks, Inc http://www.alidian.com were the most likely targets (see Sycamore Goes Shopping ).

Strategically, the purchase of Sirocco is crucial to broadening Sycamore's product portfolio. Despite ramping its sales to over $100 million in a year, Sycamore has been criticized for having a narrow product line and only a handful of customers.

"What's significant about it is that Sycamore is headed into the access market," says Jim Lawrence, program director with Stratecast Partners http://www.stratecast.com. Access equipment allows telecommunication carriers to collect a variety of traffic types in metropolitan areas and feed it into an optical core - the market segment in which Sycamore's existing products play.

Indeed, the metropolitan-area optical access market has been receiving increasing attention, both from startups and investors. Much of the recent M&A heat has been focused in the space. Chromatis Networks Inc. http://www.chromatis.com, which Lucent announced it would purchase just last week for $4.5 billion, is in the same area.

Gururaj "Desh" Deshpande, chairman and founder of Sycamore networks, said that the company was looking for a company in the access space for some time. According to some sources, Sycamore was involved in discussions with Chromatis before they were bought by Lucent.

"I don't comment on rumors, but we looked at all the companies," said Deshpande, when asked if Sycamore talked to Chromatis. "Sirocco isn't a consolation prize," he said.

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."

Deshpande said that Sycamore wasn't planning another acquisition in the immediate future, although he has grand plans for expansion. "Some day we'll be all of Supercomm," he said.

In a conference call discussing the acquisition, Dan Smith, CEO of Sycamore, said he expects the Sirocco products to go into trials this summer and be ready for customers by the end of the year.

According to Sycamore's closing stock price on Monday, the company was trading at a market capitalization of $25 billion, which means it will give up approximately 12 percent of its shares to acquire Sirocco. Following the announcement on Tusday, Sycamore shares lost $0.94 to close at $102.

"I like it, they didn't give up too much of the company," said Marc Weiss, a senior technology analyst with Amerindo Investment Advisors. Mr. Weiss noted that it's rare for such a young public company to make a $2.9 billion acquisition and give up only 12 percent. Amerindo has held a position in Sycamore since before it went public.

--by R. Scott Raynovich, Executive Editor, and Peter Heywood, International Editor, Light Reading, http://www.lightreading.com

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