Corvis priced at $36; CDOV stands to make a bit of money:
biz.yahoo.com
Tuesday July 25, 8:29 am Eastern Time
TheStreet.com - Silicon Valley
Buy Comdisco and Get In on the Hot Corvis IPO
Comdisco Ventures has a portfolio of hot tech start-ups, including optical-networking firm Corvis.
By Adam Lashinsky
Silicon Valley Columnist
If you don't know the name Corvis yet, you will. It's the next optical-networking company likely to explode onto investors' minds when, if it sticks to its schedule, it begins trading Friday after raising about $474 million.
The ordinary investor has almost no chance of getting in on this white-hot IPO, of course, despite the six-bank underwriting team, led by Credit Suisse First Boston , that will be pushing the shares.
But there is a way to play Corvis ahead of time that even savvy Wall Street money managers are already employing: purchasing shares in Comdisco (NYSE: CDO - news) , the old computer-leasing company that has transformed itself into a powerful niche player in the Silicon Valley venture capital industry. Comdisco Ventures,located in the venture capital ghetto on Sand Hill Road in Menlo Park, Calif., leases computers and other gear to promising start-ups and takes warrants as partial payment. Those warrants can pay off big when a start-up goes public.
This explains, at least in part, why shares of Comdisco have begun moving up in anticipation of the Corvis offering. Comdisco owns Corvis warrants and its shares have jumped 20% since July 11, to close at 26 Thursday. Money managers researching the Corvis IPO expect Comdisco to keep rising -- at least until the Corvis offering is complete.
There's more than the Corvis deal behind the rise in Comdisco. Comdisco Ventures, which had equity stakes in 75 public companies and 405 private ones as of March 31, is planning its own public offering, which will function as a tracking stock for the Rosemont, Ill., parent.
Not all the Comdisco Ventures companies are winners, of course. But the portfolio includes some of the hottest start-ups in technology. "It appears there are a number of gems here, and I think people are just starting to get a sense of it," notes analyst Michael Grondahl, who follows specialty finance companies for U.S. Bancorp Piper Jaffray in Minneapolis. A small sampling of the hot companies in which Comdisco holds stakes includes ONI Systems (Nasdaq: ONIS - news) , Avici Systems (another networking-products start-up that recently filed to go public), Corio (Nasdaq: CRIO - news; the software services company that priced its IPO Thursday night and begins trading Friday) and Zaffire , another new optical start-up funded by Kleiner Perkins and others.
Says Grondahl: "I sat down with our telco guys and they just drooled over the list." Grondahl, whose firm isn't an investment banker to Comdisco, rates the shares a strong buy and maintains a price target of 60, assuming Comdisco succeeds in taking public its venture-unit tracking stock.
Corvis may have the most potential, though. The Kleiner Perkins-backed start-up, headed by the founder of telecom-equipment competitor Ciena (Nasdaq: CIEN - news) , is in the superhot optical-networking sector. According to a recent Corvis filing with the Securities and Exchange Commission , Comdisco holds about 5.5 million warrants to buy Corvis shares at strike prices ranging from 18 cents to 76 cents per share. Corvis has said in filings that it plans to price its IPO shares at between 13 and 15, making the prerevenue company worth about $4.6 billion.
According to a source close to the money-management community, managers already are beginning to pay attention to the alternative ways to play Corvis, including shares in Comdisco. Careful though. "They'll probably keep buying right up through the IPO and then dump the shares two days after," says the source.
A spokeswoman for Comdisco declined to comment on the Corvis stake, citing the quiet period surrounding the proposed IPO of Comdisco Ventures. That deal has been going through the SEC approval process since April and is being underwritten by Merrill Lynch . The company is scheduled to report quarterly earnings before the markets open on July 26, at which time it will give an update on the value of its unrealized gains in publicly traded companies.
A key difference between evaluating potential IPO candy at Comdisco on the one hand, and scrutinizing investment gains at the likes of Intel and Microsoft on the other hand, is that taking low-priced warrants is part and parcel of Comdisco's business. More, there's no mystery as to when Comdisco will dump its shares. The short answer: as soon as it can. That means Comdisco isn't holding on to stakes as a favor to management in an effort to time the market or out of any strategic interest.
"Comdisco Ventures' general policy has been to sell its equity positions in an orderly manner as soon as reasonably possible after a liquidity event," the company says in its filings for the venture-units' IPO. To take the emotion out of things, Comdisco hires E.M. Warburg Pincus as its money manager.
In its filings, Comdisco says it has stepped up its venture-leasing business just in the past three years. The results show. Total revenue from the venture unit -- including leasing revenue and capital gains -- amounted to $95 million for the firm's fiscal year ended Sept. 30, 1997. Revenue for the unit was $302 million for the six months ended March 31. Net margins on the business have risen from the midteens three years ago to 25% in the last half-year reported.
Comdisco is by no means a slam dunk. Last year it bought control of Prism Communication Services , a cash-eating DSL service provider. As valuations of other DSL firms like Covad (Nasdaq: COVD - news) and Northpoint (Nasdaq: NPNT - news) have cratered, the Prism buy has put downward pressure on CDO, too.
Also, its venture unit is an equal-opportunity lessor. Its customer list includes consumer-oriented Internet dogs like E-Loan (Nasdaq: EELN - news) , Ask Jeeves (Nasdaq: ASKJ - news) and Audible (Nasdaq: ADBL - news) . But if these companies have even modest "liquidity events" -- industry parlance for IPOs or sales of the companies -- Comdisco tends to make out because it got involved at such an early stage that its strike prices are extremely low. And it takes only a few ONIs to produce big returns for Comdisco.
Comdisco isn't the only publicly traded company poised to make a killing on the Corvis IPO. Telecommunications service providers Broadwing (NYSE: BRW - news) and Williams Communications (NYSE: WCG - news) are customers and equity holders in Corvis. Broadwing holds the equivalent of 4.5 million shares in Corvis on a post-IPO basis. Williams holds 1.5 million post-IPO shares. Both companies have the right to purchase shares worth up to $5 million in the IPO.
Those sweetheart deals justifiably have drawn criticism for the conflicted position in which they place Broadwing and Williams employees. No such quandary exists for Comdisco. It's there when start-ups need it -- at the beginning -- and reaps the benefits years later. |
