Nortel mulls fibre-optics spinoff
Higher value as separate publicly traded entity would be
'powerful weapon' for making all-stock acquisitions
SIMON TUCK
Technology Reporter
Saturday, July 29, 2000
Ottawa -- Nortel Networks Corp. is seriously
considering spinning off its massive fibre-optic
components business into a separate publicly traded
company that would be worth about $100-billion (U.S.)
in market capitalization.
Nortel president and chief executive officer John Roth
told The Globe and Mail yesterday that the Canadian
giant would still want to maintain majority control of such
a new company, but that wouldn't get in the way of the
spinoff selling products to Nortel competitors. "It's
certainly something we're considering."
Mr. Roth's comments came just one day after Nortel
called off talks aimed at selling its fibre-optic
components business to Corning Inc. in return for
control of the famed U.S. company. Also yesterday,
Nortel announced it is buying Alteon WebSystems
Inc. for about $7.3-billion in stock.
Mr. Roth said Nortel is interested in spinning out the
highly profitable and fast-growing components division
because it would generate a much higher market
valuation on its own than if it remained within the parent
company. That would allow the new company to use its
valuable stock as a "powerful weapon" to make
acquisitions more cheaply than if Nortel did the deals
itself, he added.
The new company would then be able to supply Nortel
with more components for its hugely profitable
fibre-optics network operation, which is using the
explosive demand for the Internet and other
telecommunications services to drive the Brampton,
Ont.-based giant's torrid growth.
Richard Woo, a technology analyst at Thomson
Kernaghan & Co. in Montreal, said he likes Mr. Roth's
idea because the new company would attract greater
market capitalization on its own yet would still guarantee
Nortel its much-needed supply of parts.
"The big guys in networking are on a feverish pace to get
that source -- components," Mr. Woo said. "He has to
make sure he has access to those components."
Mr. Woo said he agreed that Nortel's fibre-optics
components division could be worth about $100-billion.
Nortel isn't the only network company concerned about
access to parts. Rival Lucent Technologies Inc. of
Murray Hill, N.J., announced earlier this week that it
would spin out its microelectronics division, which
includes its fibre-optic components business, for similar
reasons. Unlike Nortel, however, Lucent will not
maintain majority ownership of the new company.
Nortel's components division is on pace this year to sell
about $2.5-billion worth of parts, although about 80 per
cent of its sales are to the parent company. As reported
earlier this week in The Globe and Mail, the division
plans to expand so that it can take advantage of the
red-hot fibre-optics market to boost its capacity so that
it can sell more components to other companies. Mr.
Roth said yesterday that the division can double its
"merchant" or external sales -- as a percentage of total
sales -- to about 40 per cent of its revenue from about
20 per cent.
The market for fibre-optics components and the
networks they're used in has exploded over the past
couple of years as e-mail, chat rooms, on-line trading
and a variety of other Internet applications have
proliferated and placed significantly greater demand on
telecommunications infrastructure. Fibre-optics
networks, which use light to transmit data, are without
peers in speed and reliability.
Nortel, the global leader in selling fibre-optics networks,
has been enjoying strong growth over the past couple of
years largely as a result of its success in that market. It
makes a variety of components for its fibre-optics
networks but buys most of its parts from suppliers such
as JDS Uniphase Corp. of Nepean, Ont., and San Jose,
Calif., and Corning.
Investors have responded to the industry's success. The
big players have all enjoyed soaring share prices and two
smaller fibre-optic players, Avici Systems Inc. of North
Billerica, Mass., and Corvis Corp. of Columbia, Md.,
went public yesterday to great fanfare.
Corvis, of which Nortel rival Cisco Systems Inc. of San
Jose, Calif. owns 5.4 per cent, is awash in red ink and
has yet to record its first dollar in revenue. But its shares
gained 135.3 per cent or $48.72 to $84.72 on the
Nasdaq Stock Market during its first day of trading.
Avici shares, of which Nortel owns 14 per cent, more
than tripled in value to $96.75 on the Nasdaq Stock
Market during their first day of trading. Like Corvis,
Avici is a new company that is losing millions, although it
landed its first sale earlier this year.
Mr. Roth also confirmed yesterday that talks with
Corning broke down over control of that company.
Nortel wanted guaranteed access to Corning's
fibre-optic parts, he said, whereas Corning wanted to
remain as independent as possible so that it wouldn't
have problems selling to Nortel rivals.
He said Nortel control over a parts company such as
Corning could create problems with other parts makers
such as JDS Uniphase. The two Canadian companies
have worked closely together to lead their respective
markets and drive their phenomenal growth rates.
Mr. Roth said he doesn't expect Nortel and Corning will
be talking again soon about a partnership. "We took a
good run at it," he said. "The reasons we decided not to
do it aren't going to change in the short term."
He also said he doesn't think Nortel will hook up with
another of the parts industry's major players because that
would present similar problems as the proposed Corning
deal. Instead, Nortel will likely focus more on acquiring
smaller companies. "It's much easier to acquire a
[startup] technology firm than something big." |
