Osicom Investors Rebel

Osicom Technologies Inc. (Nasdaq: FIBR) says it wants to unlock the shareholder value of its Sorrento Networks Inc. subsidiary. But on a conference call with money managers and analysts Wednesday, all Osicom managers could unlock was the pent-up frustration of their shareholders.

During the hour-long call, which seemed to last all afternoon, Osicom managers endured a steady stream of verbal abuse, as shareholders lambasted company leadership and second-guessed Osicom's decision not to take Sorrento public.

"I would think you'd be better off having high school students as board members than you are having anyone with any prior association with Osicom," said Thomas Barton, a general partner at White Rock Capital, a Dallas-based hedge fund.

Mr. Barton's dissatisfaction was shared by many on the call and here's why: Osicom has been dogged by controversy for years for everything from overstating the value of contracts to having its stock artificially inflated by groups allegedly linked to organized crime, a claim its executives refute.

For instance, in July, Osicom paid $3.75 million to settle a shareholder suit that alleged that it overstated the value of an overseas equipment contract by over $80 million.

In general, investors were relieved when it appeared Sorrento was on the path to an IPO, because it would have meant the firm was becoming more independent of its tarnished parent. (See Sorrento Puffs Itself Up for an IPO)

What investors were not expecting was for Sorrento to combine with Osicom and have several Osicom directors take board positions in the new combined entity, which will still be called Sorrento Networks and trade under the symbol SRTO.

Osicom defends its decision, saying shareholders will see more value if Osicom and its Sorrento subsidiary are combined into one firm.

This plan, announced Tuesday, will have the smallest tax impact on the new Sorrento and its shareholders, Sorrento executives say. Also, this combination will allow shareholders to receive some stock in Entrada Networks (Nasdaq: ESAN), Osicom's other subsidiary that just merged with Sync Research.

"What's really important here is that we're looking at the end game rather than the process," said Xin Cheng, Sorrento's CEO, in an interview with Light Reading on Wednesday afternoon. Mr. Cheng said that, in the end, Sorrento will be a standalone, public company, which is what is best for the company and its customers.

Investors on the Wednesday call, however, could not have been less impressed. The majority of shareholder frustration wasn't directed at Sorrento Networks' technology directions or its Gigamux DWDM products (See Report Forecasts Metro Winners, Losers and Sorrento: Hot Product or Hot Air?). Instead, investors were bent because of the departure of a couple of experienced managers and the abundance of board members who have ties to Osicom.

"You can call it whatever you want, [the new Sorrento] is basically Osicom with a new symbol," one money manager said.

Sorrento's new board will include Osicom directors Rohit Phansalkar, former managing director of Oppenheimer & Co.; Leonard Hecht, co-founder of Xerox Development; and Xin Cheng, founder of Sorrento Networks, who would be president and CEO of the new Osicom-Sorrento combination.

The board also includes independent directors Gregory Grodhaus, president of Inrange Technologies Corporation; Tingye Li, past head of the Lightwave Networks research department of AT&T Research; and Rajendra Singh, CEO of Telecom Ventures LLC.

Stepping down as active manager, however, is Sorrento's current CEO Oren G. Shaffer, the gray-hair hire from Ameritech who was supposed to help give Sorrento the Wall Street credibility it would need to pull off a sterling IPO.

Rohit Phansalkar, Osicom's chairman and CEO, also is giving up his management roles, though he'll remain on the board of the new Sorrento. Mr. Phansalkar's announcement that he would still have a Sorrento board seat was yet another thing investors didn't want to hear.

"I don't understand why its so important that Hecht continue on the board...We can't find someone more qualified than Leonard Hecht to be on the board?" said White Rock's Barton, his voice dripping with disgust.

"I don't understand why we can't find someone more qualified than you, Ro [Phansalkar], to be on the board," he continued. "I don't know how you expect to be able to proceed, when basically all you did was try to pretty this thing up and keep all the Osicom guys still in place."

Phansalker then responded to the screed, noting that the firm intends to appoint two or three more independent board members soon. He also defended Mr. Hecht, but not himself.

(A bit later, Barton wondered aloud why he wasn't asked to be on the board.)

Sorrento and Osicom executives still seemed to dance around questions, pointing to their firm's recent pre-IPO quiet period. They promised to give more details about the firm's financial health during an upcoming earnings call that's scheduled for next Friday.

Cheng admits things could have gone smoother on today's call, but says he didn't intend to announce the restructuring so soon. His mind was changed when a press leak was discovered, forcing Sorrento to go on the offensive.

When all was said and done, Cheng says he understands why investors were so agitated during the conference call. Osicom, with its scandal-ridden past, stirs emotions easily, and certain investors thought they'd get a free ride from Sorrento's IPO by buying up lots of Osicom shares early on, he says.

Indeed, while it's true that all things Osicom are ugly, it's equally true that any investor who bought into Osicom just to sneak into the Sorrento IPO -- and is now indignant that the IPO plans have changed -- is a bit of a hypocrite.

At the same time, Sorrento management is wrong to be so conservative as to prevent the Sorrento IPO. They can point to the dotcom crash all they like, but optical IPOs have done well, in spite of recent market downturns. Sorrento’s management also deserves criticism for continuing to provide shelter for the fat cats at Osicom.

Still, even with the regret that Sorrento won't go the IPO route, not all investors are sour. There is some light at the end of this tunnel -- and we don't think it's a train. "Frankly, if you're after a value play, this is probably the greatest one in the optical space," says Bijan Halavi, managing director at PPI Capital.

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

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