Investors Head for Luminent's Back Door

MRV Communications Inc. (Nasdaq: MRVC) found a crush of buyers a day after the IPO price range for its Luminent Inc. subsidiary was set (See Luminent Closes in on IPO). MRV shares closed at $60.81, up $4.31 or 7.63 percent.

The sudden buying looks like a bid to make some quick money off MRV as the "back door" to the Luminent IPO. But such investment strategies have inherent risks, and it's anybody's guess as to when such buying cycles start and stop. Luminent filed for an IPO months ago (see Optical Stock Watch: MRV Communications (Nasdaq: MRVC)).

"We're hoping that the market hasn't fully realized the value of some of MRV's holdings," says Christopher Thiessen, an analyst with MetaMarkets.com Inc.. "We don't know exactly how the market will respond [to MRV]. But no matter what happens, in six months, we get shares of Luminent's IPO anyway."

MRV announced that within six months to a year after Luminent's IPO, it will issue Luminent shares to its shareholders. Specific terms for that distribution will be set later.

Back-door plays of IPOs don't always work out the way investors plan them. For example, investors were recently burned when, in anticipation of an IPO from Sorrento Networks Inc., they loaded up on shares of its wayward parent, Osicom Technologies Inc. (Nasdaq: FIBR). Osicom then announced that Sorrento would be combined with the parent company, a move that didn't go over well with Osicom shareholders (see Osicom Investors Rebel). Perhaps that's why the Luminent enthusiasts waited until at least the price range was announced to start the buying.

Experts also cite MRV as a tricky investment, because it is now primarily a business incubator and the sum of its pieces is difficult to evaluate. "One of the main problems that MRV has faced in the past is that they do have all these different divisions and it's hard for the market to value all the pieces as a whole," Thiessen says.

MRV's business units include iTouch Communications, Optical Access, and NBase-Xyplex. MRV's venture investments, which include stakes in Zaffire Inc., Charlotte’s Web Networks, Zuma Networks, and others, are still relatively unknown quantities.

Investors should consider what might happen to MRV once the Luminent IPO has played out. Prior to Palm Inc.'s (Nasdaq: PALM) IPO, 3Com (Nasdaq: COMS) shares reached a high of $119.75. 3Com shares are presently $16.94, down more than 43 percent from its high a year ago this week.

MRV is presently up more than 355 percent from its year-ago price. Now it may became a game of guessing the top.

"We think that an incubator in optical networking is interesting stock, and optical's a hot sector at present," says Erik Weir, president and CEO of Weir Capital Management, which holds a position in MRV. "But MRV is a stock we're going to own for a season, just like CMGI was great for a season. You just don't want to be the last one to figure out that the season's over."

-- Phil Harvey, senior editor, Light Reading http://www.lightreading.com

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