Many of the world's big telecom equipment vendors may end up spinning off their optical networking divisions into separately quoted subsidiaries if the current stock market craze for all things optical continues, according to financial analysts.

The first one to go this way may be Siemens AG http://www.siemens.com, which last Friday (Feb 25) announced that it was planning a big organizational shake-up which will go into effect on April 1. As part of this shake-up, Siemens plans to hive off its optical networking operations into a separate U.S. company to be called Optisphere. Siemens declines to give further details, but sources within the company don't rule out floating Optisphere shares in the U.S. These developments come only a week after the chairman and CEO of Lucent Technologies http://www.lucent.com, Richard McGinn, tried to quell speculation that Lucent might spin off its opto-electronic component division, which sells 75 percent of its output to non-Lucent companies. After Lucent's annual shareholder meeting on Feb 16, McGinn told journalists that he could see "no compelling reason" why such a move would unlock shareholder value.

The idea of creating a special class of Lucent stock that tracked the performance of Lucent's opto-electronic division was first floated by Nikos Theodosopoulos, managing director of equity research at Warburg Dillon Read LLC http://www.wdr.com.

In a paper last December, Theodosopoulos noted that the market capitalization of JDS Uniphase Corp. http://www.jdsu.com, another component vendor, was 20 to 30 times its annual sales. If the same ratio was applied to Lucent's optical component division, it would be worth $25-35 billion, he said. "Given that Lucent Opto represents about 2-3 percent of total Lucent sales and 3-5 percent of total Lucent operating profits, this value is not reflected in Lucent's stock today," he said. Theodosopoulos recommended rectifying the problem by staging an IPO or following the example of AT&T, which has a special class of shares that track its wireless interests.

Speculation over the spin-off of Lucent's opto-electronic component division has led to even wilder rumors that the vendor might spin off the whole of its optical networking operations, in a similar move to the one planned by Siemens. The market capitalization of such a company might exceed Lucent's itself, according to Noam Lotam, president and CEO of MRV Communications Inc. http://www.mrv.com, an Israeli VC that specializes in funding optical networking start-ups. Lucent says this is rubbish, noting that its market cap has been as high as $240 billion.

Others note that spinning off its optical business could pose valuation problems for the the remaining portion of Lucent. "You'd have to ask yourself 'what's left that's interesting?'" says Evan C. Sanders, vice president of sales at CyOptics Inc. http://www.cyoptics.com, an optical component manufacturer. The possibility of optical networking spin-offs also extends to other major vendors. Nortel Networks http://www.nortelnetworks.com was rumored to be considering such a move last summer.

by Peter Heywood, international editor, Light Reading http://ww.lightreading.com