Is Cisco still a slouch in the optical market or a diamond in the rough??? If in fact CSCO execute in the optical market it would seem that any modest amount of errorsion to market share in the high end router space will be more than made up for. With this in mind is CSCO's stock getting an unfair battering???
redherring.com
Cisco funnels optical networking IPOs to market
By Stephen Lacey
Redherring.com, October 18, 2000
Cisco Systems (Nasdaq: CSCO) is just like you -- it would love to know what's going to
be the next big thing in networking, and which company holds the key to it. That's why
the networking giant continues to make investments in companies -- large and small,
new and old. Unlike the average investor, however, Cisco is not entering purely for its
financial interests, but as a strategic defense.
"Cisco has more money than God," says Paul Johnson, an analyst at Robertson
Stephens. "But they don't have more time than God."
While Mr. Johnson's comments are made with his tongue firmly in his cheek, he does
admit that Cisco is racing against the clock to beat the competition. Unlike optical
networking rivals such as Corning, Cisco's investments, industry analysts point out, are
motivated more by gaining access to new technologies than by purely financial
considerations.
The acquisitions of Cerent and Monterey Networks, both of which were early-stage
Cisco investments last year, allowed Cisco to dramatically hasten the delivery and
routing capabilities of its networking equipment. Similarly, its purchases of Arrowpoint
Communications, for its optical switches, and Qeyton Systems, for its metropolitan
dense wave division multiplexers, in May for $7 billion and $800 million, respectively,
showed just how far Cisco is willing to go to acquire rather than design new
technologies.
And while Cisco is by no means alone in this buy-versus-build strategy, a look at the
current stable of optical networking companies it has backed suggests that nowhere is
it more pervasive. Quantum Effect Devices, a manufacturer of embedded
microprocessors used in routers, and ONI Systems, optical networking solutions for the
metropolitan market, both went public this year. Both list Cisco as a significant
customer and received pre-IPO financing from the networking giant. (Cisco also backed
Corvis Communications.)
Indeed, the links between equity investor and financier are becoming increasingly
intertwined. Optical component manufacturer Cidra, which this past week filed
documents for an IPO, lists just two customers -- Cisco and Covis.
And from all indications, Cisco's influence on the IPO market is far from over. Optical
switch manufacturer Tellium, a portfolio company, is already in registration. Cisco also
has invested in privately held optical companies such as Cyoptics, Gemfire, Lightlogic,
Novalux, Oraccess, and iPhotonics.
Although no one knows what technology will emerge, Mr. Johnson says that Cisco does
not want to be left behind. For example, Novalux, which took in a $109 million
third-round investment in September, is developing a new class of lasers that will allow
operators to more efficiently operate networks through greater amplification,
generation, and distribution of light signals. And Israeli-based Oraccess is looking to
extend a network's reach into the so-called last mile through its wireless optical
technology.
If anyone thought that recent market turbulence might be cause for Cisco to slow its
penchant for early-stage investments, guess again. More than likely, Cisco's name will
be embedded within the filings of more and more optical networking IPOs.
SAFETY IN NUMBERS
But it's not just Cisco that's trying to find the winners among companies emerging in the
fiber optics space; it's nearly all the big names on the block. Nortel Networks, Lucent
Technologies, Sycamore Networks, and Sonus Networks all are chasing the newcomers
in the space with capital investments as well.
At the same time, the increasing role of strategic/financial arrangements is beginning to
raise red flags among regulators. Take the recent offering from Cosine Communications,
which drew the ire of the Securities and Exchange Commission for purchase agreements
that were tied to warrants to purchase Cosine stock. In this instance, as was the case
for ONI Systems, the SEC forced Cosine to restate revenue downward to reflect sales
associated with purchase agreements from customers such as Qwest Communications.
To be sure, money alone isn't really what these newcomers desire from the big players
in the market. For newly public companies such as Corvis -- which also had
purchase/equity deals with Qwest, Broadwing, and the Williams Communications Group
at the time of its IPO in July -- the basis of the relationships has as much to do with
strategic reasons as financial ones.
Companies like Corvis and Cosine are after the beta-testing services on their products
that these established firms can provide, according to William P. Collatos, cofounder and
managing partner of Spectrum Equity Investors in Boston, which focuses on the
communications industry. In addition, Mr. Collatos says the older companies possess
strong customer relationships that newcomers desperately need to tap into in order for
their products to quickly gain market acceptance.
FIBER ON THE WAY
With so many public companies racing to make venture investments, the comfort level
investors used to get from seeing a technology bellwether as an investor has been
numbed. In the past, all that was needed to secure a big opening-day pop was the
mention of a Cisco, Intel, Oracle, or Microsoft among its roll of investors. Today, it's
rare to see a high-profile telecom IPO without these equity partners. In many cases,
investors expect to see these relationships.
So while small-cap investors are growing increasingly aware of Cisco's role in the IPO
market, Johnson says it's more important than ever that investors review the nature of
a company's relationships before investing in an IPO. With so many new component
manufacturers entering purchase/equity agreements, and with the limited number of
large equipment vendors, even Mr. Johnson admits that it's extremely difficult to
delineate between investor, customer, and vendor. |
