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Cisco weighing buyout of Corvis
By John Shinal
NEW YORK. 7:50 PM EST-Cisco Systems (nasdaq: CSCO) is evaluating startup Corvis as a potential acquisition to enhance its position in the burgeoning market for optical networking equipment, sources close to the companies said.
However, the sources say preliminary discussions have yielded no agreements and no deal appears imminent. Officials at Cisco and Corvis declined comment on whether the companies are in talks. Cisco took an undisclosed minority stake in Corvis during its third round of financing earlier this year and Mike Volpi, a Cisco senior vice president who heads the company's acquisition team, is a Corvis board member.
At Cisco's annual analyst meeting Dec. 1, Executive Vice President Don Listwin said the company was evaluating optical technologies and might wait up to 12 months before deciding to either acquire or develop any additional products. However, now that Cisco rival Nortel Networks (nyse: NT) has agreed to buy Corvis rival Qtera for $3.25 billion, some analysts said Cisco may have to speed up its timetable.
"Cisco will be forced to do something in optical sooner rather than later," said Paul Johnson, an analyst at BancBoston Robertson Stephens, who rates Cisco a "buy."
The sources said that Nortel made an offer to buy Corvis, and that the bid was turned down. Corvis Chief Executive David Huber values his company at more than $3.25 billion, they said.
Telecommunications service providers such as Qwest Communications International (nasdaq: QWST), Williams Communications (nyse: WCG) and MCI WorldCom (nasdaq: WCOM) want optical equipment to increase the speed and efficiency of their networks. The equipment made by Qtera and Corvis increases the distance that light can travel on fiber optic networks without being regenerated. Such signal regeneration is inefficient and accounts for more than 30% of the cost of long distance network equipment, says Tom Valovic, an analyst at market research firm International Data Corp.
The Corvis product line includes equipment for both transmitting data over fiber and switching it to other networks. Corvis' gear will begin field trials with Qwest and Williams early next year. Qtera's gear also has been tested by Qwest and a Qtera spokesman said the product will be commercially available in the first half of 2000.
Nortel, Lucent Technologies (nyse: LU) and Ciena (nasdaq: CIEN), which Cisco evaluated but chose not to buy last year, are among the leaders in a type of optical networking equipment known as wavelength division multiplexers (WDMs). WDMs increase the capacity of fiber optic networks by splitting beams of light traveling on the fiber into multiple colors, or channels.
Corvis's Huber also founded Ciena, which pioneered the WDM market.
Cisco has no WDM products for sale, and many analysts believe they need to have them to compete with Lucent and Nortel. IDC predicts U.S. sales of WDM gear will total $2.1 billion in 1999 and more than double to $5.1 billion by 2003. Nearly all WDM sales today are for gear that carries long distance traffic. Sales of so-called Metro WDM, which handle traffic on dense networks in large cities, are expected to take off next year, Valovic said.
Listwin said at the analyst meeting that the company will use technology it acquired when it bought optical startup Cerent to build a Metro WDM product, yet that may take more time than the company has. Cerent's product is a new type of gear that links the synchronous optical network (SONET) equipment that carries regional voice and data traffic with the routers that direct Internet traffic. Cisco is the dominant maker of such routers, while Nortel is the leading supplier of SONET in North America.
The $3.25 billion Nortel paid for Qtera is less than half the $7 billion Cisco paid for Cerent. Cisco Chief Executive John Chambers said last month the company expects $300 million in Cerent product sales in 2000. As with Corvis, Cisco had a minority stake in and a board seat at Cerent before it agreed to buy the company in August.
Because of the huge growth expected in the optical networking market, investors have rewarded optical networking companies with stunning valuations. Sycamore Networks (nasdaq: SCMR), for example, has reached a market worth of more than $18 billion after less than two months as a public company.
Some analysts, though, are skeptical that those valuations will hold up and said it may be prudent for Cisco to wait before shelling out an amount similar to its Cerent purchase for nascent or unproven technologies. "Cisco may be waiting to make a more rational offer" when the valuations shrink, said Kevin Slocum, an analyst at SoundView Technology Group.
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