Great article in Israel Investor! kudos to Mark Savolainen Smith for finding and reporting on this gem! It looks like he'll be tracking this company over the coming months....
What a difference a year makes. As 1999 dawned, MRV investors were close to administering last
rites to the company. Only one year later, the company has not only revived, but seems bursting
with energy. The atmosphere surrounding MRV has swung 180 degrees from grim to
giddy. A tenfold run in stockprice (1999 alone) goes a long way towards accounting for this mood
swing, but there is much more to this story. There's a new business plan with the technology and
the talent to back it up.
For years MRV Communications (Nasdaq: MRVC) pursued the strategy of a vertically integrated
networker. Expanding aggressively both through internal growth and acquisition, MRV seemed to
be on track, but in mid 1998 hit the wall. A variety of factors conspired against it, but the most
significant was increased competition in the low-end switching market, and the slowdown in
international demand from both Asia and Europe. If this weren't bad enough, MRV's internal product
development was delayed, and revenues suffered accordingly. Short sellers piled on, and MRV's
share price sank like a stone from the 20's to below $6 per share in two weeks at the end August of
that year.
To MRV's credit, management stayed the course and continued to investaggressively in R&D,
knowing that although this made short-term earnings numbers look worse, therein lay the future
success of the company. As importantly, management also re-examined its business plan and
concluded that change was in order.
MRV's technology had always been innovative. MRVC was first with the 10/100 dual speed LAN
switch, first to deliver Gigabit Ethernet, and first to deploy Wavelength Division Multiplexing in
residential access networks. In 1998, the company raised the ante and began to push R&D even
more aggressively, including projects in next generation core systems in both optical networks and
high speed carrier class Terabit routers. More than a few who followed
the company closely, shook their heads in disbelief, mumbling about lack of focus.
During these dark days of 1998 such grand ambitions seemed quixotic at best. What the
nay-sayers failed to see was that MRV had hit upon a new business model. Out was the vertically
integrated one-company paradigm, and in was the CMGI model of a network of affiliated
companies.
The CMGI model is that of a company of companies, neither conglomerate, venture capitalist nor
holding company, though embodying some elements of all three. CMGI transformed itself in the
90's from a sleepy college marketing group into a powerhouse of Internet start-ups (and Wall Street
darling) after hitting upon a strategy of investing early in promising Internet companies, not simply
for return on investment, but also for their fit with one another. CMGI has succeeded by becoming a
catalyst for creating value, providing not only venture capital, but also infrastructure
support, mentoring and partnerships.
MRV seems to have taken a page from CMGI's play book. In 1998 MRV added another strategic
focus to the company: affiliated start-ups. At the same time, frustrated by the low valuations Wall
Street was placing on various pieces of their business, especially in the context of the significant
valuations the stock market was placing on companies with comparable product lines, they
restructured their existing business to allow for the possibility of spinning off their fiber-optic
component business and otherwise unlocking value within MRV's diverse product lines.
These moves reinvigorated the company. New partners brought not only cash, but a fresh
perspective, and the expertise to bring MRV's next generation technology to the market as quickly
as possible. Within the ranks of MRV, the entrepreneurial spirit was re-ignited as key personel saw
MRV as a vehicle to realize their own start-up dreams.
Today MRV is back, the clouds of doubt have lifted and the "smart" money is buying in. Currently
MRV has seven pieces, four which are 100% owned by MRV, and three of which they control lesser
percentages. Each could be spun-off or otherwise have value realized.
Here are the pieces of MRV and their business focus:
* New Access - optical networking
* Optical Access - fiber-optic components
* Hyperchannel - business to business e-commerce
* Zuma - network supercomputer switch router
* Charlotte's Web - terabit router
* All Optical - unannounced
* NBase-Xyplex - LAN, WAN and remote access
So what might MRV be worth if each piece is valued separately? In a recent Barron's interview, Dan
Schwartz, of the hedge-fund firm York Capital Management, summed up the situation when he
commented "If you do a sum-of-the-parts analysis you can get anywhere from the 60s-70s to
ridiculous numbers on the stock..." Shortly thereafter, First Security Van Kasper reiterated their
Strong Buy on the company, raising their 12- to 18-month target for MRV from $40 to $160, adding,
"In our opinion, there is still significant upside from our price target."
So what might this "ridiculous," "significant upside" be? Why aren't numbers being named? In a
nutshell, the problem (if you want to call it that) is with the fantastic market valuations of companies
in similar niches to those of the MRV family. They read like a who's-who of the
gravity defying high profile net-equipment (and related) IPO stars of 1999 including Finisar
(Nasdaq: FNSR), Sycamore Networks (Nasdaq: SCMR), Juniper (Nasdaq: JNPR), Foundry
Networks (Nasdaq: FDRY), and Extreme (Nasdaq: EXTR) for starters. Redback Networks (Nasdaq:
RBAK) should also be thrown in for good measure along with VA Linux Systems (Nasdaq: LNUX).
Each division and each affiliate of MRV is unique, with its own story and potential. Check back soon
for our next article in this MRV series. |
