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To: ok1day who wrote (101018)	6/7/2000 11:01:00 AM
From: puborectalis	Read Replies (1) \| Respond to of 120523

TheStreet.com - Silicon Valley Out on a Limb? Sycamore's Sirocco Buy Fills a Need, but It's Pricey The all-stock deal, which represents 11% of Sycamore's market value, fills an important optical gap. By Scott Moritz Staff Reporter Wasting little time agonizing over being outbid for optical-network-gear maker Chromatis by Lucent (NYSE: LU - news) last week, Sycamore (Nasdaq: SCMR - news) jumped back into the metro-gear-acquisition hunt and snatched the next best thing Tuesday. And to hear Sycamore tell it, the $2.9 billion all-stock acquisition of Sirocco Systems was the perfect and only missing piece in the company's optical-networking product line. Hey, when you're down a few notches on the food chain from mega predators Cisco (Nasdaq: CSCO - news) , Lucent and Nortel (NYSE: NT - news) , you're apt to make anything you get your hands on sound scrumptious. Sirocco may not have been the only optical newbie to catch Sycamore's eye, but it was priced right. At a time when the going rate for optical outfits exceeds $30 million per employee -- as Nortel demonstrated with its Xros buy and Lucent with its Chromatis deal -- Sycamore's $23 million per head sounds like a bargain. But even though it paid below market for an optical-gear maker, the deal puts Sycamore out on a limb. The $2.9 billion price tag represents more than 11% of the company's total market value. And shares of Sycamore, which traded at 199 in March, have fallen 50% from that level in recent market fluctuations. Yet like other networking firms, namely Cisco, facing the do-or-die proposition of filling holes in their optical product line, build or buy becomes the only immediate option. And what better time to buy than now, when Wall Street fails to sees little downside to optical plays. "It wouldn't make sense for us to start from scratch and develop this technology," says Sycamore founder and chairman Gururaj "Desh" Deshpande. "With Sirocco we have a group of people who have sweated this out for the last year and a half." Caution to the Wind Sycamore had just turned profitable last quarter with pro forma net income of 5 cents per share on $59.2 million in revenue for its fiscal third quarter ended April 29. But Sycamore's time in the black may be short-lived given the diluting impact of the Sirocco deal. Sirocco's optical devices sit at the edge, typically in cities or the metro segment of the network, where they act as junction boxes for local traffic to be merged onto larger pathways. Sirocco's products -- an access device called Zephyr, a switch named Typhoon, and a network management system called Tempest -- are in trials and are not expected to generate revenue this year, and the deal will cut into Sycamore's bottom line until fiscal 2002. "The gamble is not so much, 'Is the timing right,' the gamble is more 'Will the market happen.' And at this time we feel very comfortable that the market is about to happen," says Deshpande. Sycamore's financial risk is that the deal cuts two ways, says Robertson Stephens analyst Paul Johnson, who has a buy on Sycamore. Robertson Stephens has no banking ties to Sycamore. "The greater the risk, the more serious Sycamore will be to make sure it works," says Johnson, referring to Sycamore's effort to weave Sirocco's technology into the Sycamore family. Securing the intellectual power to meld the differing technologies has been an obstacle for some companies buying leading-edge start-ups. Lucent found it had to dangle extra incentives for talented staffers to come over from Chromatis. The one advantage Sycamore may have in making the deal work is the similarity of cultures between the two companies, says Johnson. "Besides the economics there is also an intellectual excitement that the two companies share," says Jonathan Reeves, president and CEO of Sirocco, who will head Sycamore's new optical access division. "There is even stronger resonance in the opportunity that we see to go out and basically kill the competition," says Reeves. "So we are better off working together."