An Article About the Deal of Broadwing Broadband Business:
Corvis' Deals Raise Questions by Sarah Cohen, Jun-18-2003 at thedeal.com
In the battered optical equipment sector, Corvis Corp., with its clean balance sheet and rich cash reserves, appears on the surface like an odds-on favorite to survive the telecom slump.
But analysts say several questionable acquisitions raise concerns about the prospects for the Columbia, Md., company's core equipment business.
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In February, with its stock dwindling to 61 cents per share, Corvis said it would join St. Louis buyout firm Cequel III LLC to buy Broadwing Inc.'s broadband services unit for $129 million in cash and $375 million in operating liabilities. (Broadwing, a Cincinnati-based telecom, has since changed its name to Cincinnati Bell Inc.)
The acquisition of a broadband services provider by Corvis, a maker of optical equipment, has baffled analysts. One called it "the stupidest thing I've heard of in ages."
Corvis manufactures optical switches, devices for moving data and voice signals within networks, and related technology. It competes with industry heavyweights including Lucent Technologies Inc. of Murray Hill, N.J.; Alcatel SA of Paris; and Ciena Corp. of Linthicum, Md. By contrast, Broadwing uses optical equipment to provide Internet and phone service.
Following the Broadwing deal, analysts Simon Leopold of Merrill Lynch & Co. and Hasan Imam of Thomas Weisel Partners LLC in San Francisco suspended coverage of Corvis pending a clearer description of the company's business model.
Leopold, who has not resumed coverage of Corvis, called the acquisition "puzzling" because of the poor synergy between broadband services and telecom manufacturing.
Another source was more blunt. "The acquisition is ridiculous," the source said. "If Broadwing can't make it work, a company without scale or operational experience has no business taking it on."
Imam earlier this year discontinued coverage of Corvis, citing the company's identity change. But last week he resumed rating it and became the first analyst to embrace the deal.
"The acquisition makes sense from a pure financial engineering point of view, using cash on the balance sheet to buy an undervalued telecom asset with a significant revenue run rate," Imam said. "This is especially true since pure cash isn't yielding much these days, and networking equipment revenues are very depressed."
In his analysis of the deal, which closed Friday, Imam projects Broadwing's annual revenue at $700 million. Corvis reported $448 million in cash in the first quarter.
Perrin, by contrast, is unconvinced. "Corvis is clearly jeopardizing its whole equipment business by becoming a competitor to its customers," he said.
Andy Backman, vice president of investor relations at Corvis, defends the play for Broadwing, which he says is on the upswing. "We're acquiring assets debt free," he said. "You have to understand, we're stripping away $2.5 billion or so in debt. The unit has already gone through a restructuring, and we believe the acquisition will generate positive returns."
Backman also said Broadwing will have its own management team, led by telecom industry veteran Jerry Kent, who will be CEO of the subsidiary.
Another explanation for the Broadcom deal is that Corvis did not want to risk losing its biggest customer to another telecom provider or other rival. In fiscal year 2002 the broadband unit accounted for 44% of Corvis' $20 million in revenue.
In the first quarter, revenues at Corvis' newly acquired broadband division fell 22% to $211 million, compared with the year-ago period. Cincinnati Bell attributed the drop to "customer bankruptcies, exiting lines of business, and weak demand in the carrier and IT hardware markets."
For all of 2002 the unit reported revenue of $1 billion and a net loss of $2.4 billion, compared with Corvis' net loss for the year of $508 million. |
