From Forbes.com:
forbes.com
May 04, 2000
ONI Systems' Quiet Period Anything But
By John Shinal
SILICON VALLEY. 3:50 PM EDT-ONI Systems, a startup maker of optical networking gear, has been busy with more than the usual work load since it filed for an initial public offering on March 10.
In the last seven weeks, the company has been sued by and countersued Nortel Networks (nyse: NT), entertained possible takeover interest from another big rival and replaced its chief financial officer.
Amid all the activity, San Jose, Calif.-based ONI managed to set the price range for its 8 million IPO shares at $14 to $16 each.
On April 24, the company replaced its CFO, Terry Schmid, who'd been with ONI since early 1998 when it was founded under the name Optical Networks. Chris Davis, former CFO of General Dynamics' (nyse: GD) Gulfstream Aerospace division, will take over for Schmid and accompany ONI Chief Executive Hugh Martin on the roadshow with prospective IPO investors.
If ONI can get past all the distractions and isn't bought out, its IPO is likely to be at least moderately successful, although current market conditions suggest the offering probably won't be received with the unbridled enthusiasm that investors showed last October for Sycamore Networks (nasdaq: SCMR).
ONI is developing switches that use pulses of light to send Internet data and voice calls over so-called metropolitan-area networks. Those densely wired networks carry huge amounts of local and regional telecommunications traffic.
ONI's first product, the OnLine 9000, is being tested by several service providers, including Williams Communications (nyse: WCG). The gear uses wavelength division multiplexing (WDM) technology, which expands the capacity of fiber optic networks by splitting the beams of light on fiber optic cable into multiple colors, or channels.
The technology is similar to that used in products made by Nortel, Lucent Technologies (nyse: LU) and Ciena (nasdaq: CIEN). In the eyes of Nortel, in fact, ONI's products--not to mention its employee roster--are a little too similar to Nortel's own. The same day ONI filed its S-1 registration statement with the Securities and Exchange Commission, Nortel sued the company for the second time.
Nortel first sued ONI in October in a Montreal court after ONI hired more than a dozen engineers from the Canadian giant's optical unit. The suit also accused ONI of stealing Nortel trade secrets. In December, Nortel obtained an injunction prohibiting 10 of its former employees who joined ONI from recruiting any other Nortel workers or from sharing knowledge of certain Nortel technologies.
Nortel's second suit, filed in San Francisco, is a broader claim that accuses ONI of infringing on five of its optical networking patents and of implementing "a systematic strategy for accessing Nortel's technology, trade secrets and other confidential information." ONI has hired more than 30 former Nortel workers.
ONI countersued on April 14, accusing Nortel, among other things, of failing to deliver promised optical components to ONI and of delivering software that didn't meet agreed-to specifications. The latter action, ONI claimed in the suit, forced the company to recall 20 products that had already been delivered to customers.
ONI also accused Nortel of pressuring two of its suppliers, Beltron Technologies, which makes testing software, and Metal Leetwo, a maker of circuit boards, to stop doing business with ONI. Both Beltron and Leetwo, which also do business with Nortel, canceled arrangements with ONI after Nortel threatened to end their contracts, ONI claims.
"We believe there's an intent to interfere with our business," says Larry Loper, ONI's vice president of communications. He declined further comment. Nortel spokesman Jeff Ferry declined comment on the suit.
There's a good reason why Nortel is possessive of WDM technology designed for metro markets. While Nortel, Lucent and Ciena dominate the market for WDM equipment that carries long-distance traffic, ONI's equipment is targeted at a more wide-open arena.
"There is more opportunity for startups in the metro WDM market than for long-haul WDM," says Tom Valovic, an analyst with market researcher International Data Corp. IDC predicts the market for all optical networking equipment will double to almost $8 billion from an expected $4 billion in 2000.
Valovic adds, however, that the window of opportunity for ONI and others will close as the big players develop or acquire new technologies. Both Nortel and Cisco Systems (nasdaq: CSCO) have been aggressively acquiring optical technologies.
In fact, a person familiar with ONI says Cisco expressed interest in ONI as a takeover target--Cisco already has a minority stake in ONI. The source added, however, that preliminary discussions went nowhere when it became clear that ONI's Hugh Martin valued his company at more than the $7 billion Cisco paid last year for another optical startup, Cerent.
Officials from ONI and Cisco declined comment on any talks. Another source familiar with Cisco said any discussions the two companies may have had never reached the point where a buyout offer was made.
Valovic said it wouldn't surprise him if Cisco bought "a company like ONI," because Cisco has no metro WDM products and will need them to keep pace with Lucent and Nortel.
Given that ONI's products are already in the testing phase, a $7 billion price tag isn't unreasonable. Even after the recent downturn in tech stocks, Sycamore's market capitalization is $19 billion. In December, Cisco paid more than $2 billion for the optical unit of the Italian conglomerate Pirelli SpA. And Nortel has paid more than $3 billion each for two companies, Qtera and Xros, which have yet to finish their products.
According to its S-1, ONI had a loss of $43.3 million, or $2.40 per share, for 1999 on sales of $3.03 million. The company spent more than $25 million on research and development alone last year, and more than half of its 202 employees worked in R&D as of December. |
