Is Sonus Worth the Price?

Sonus silliness: Careful about getting caught up in Friday's rumor that Cisco (CSCO - commentary - Cramer's Take) may be interested in buying Sonus Networks (SONS - commentary - Cramer's Take).

The news caused Sonus' stock to leap nearly 16.8% Friday, closing at $3.83. But at that price, say some short-sellers, Sonus may be expensive. Sonus makes what is known as a "media gateway" -- a link that takes voice messages out of the circuit-switched world and drops them into the packet-switched universe of Voice over Internet Protocol, or VoIP. For better or worse, say the shorts, it's really nothing more than a commodity business with tumbling prices.

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What's worse, points out one Sonus short, at least one-third of its customers, such as Global Crossing (GBLXQ - commentary - Cramer's Take), Z-Tel (ZTEL - commentary - Cramer's Take) and XO Communications (XOXO - commentary - Cramer's Take), have all but died, while others -- Level 3 (LVLT - commentary - Cramer's Take) and DataNet -- are on the ropes.

Where does that leave Sonus? Depends on how acquisitive Cisco or any other company in its space, such as Lucent (LU - commentary - Cramer's Take) or Nortel (NT - commentary - Cramer's Take), really cares to be right now. None are under pressure to make acquisitions. "Or in the case of Lucent and Nortel," says the short, "no real currency to do it."

But wait, there's more: In all of 2001, according to Goldman Sachs, Cisco paid $330 million for two acquisitions. The last time Cisco paid $800 million was sometime around the height of the bubble. That's roughly what it would cost to buy Sonus at today's price plus the cash on its books. But at 4.7 times sales (subtracting cash), that's a sharp premium to the 3.5 times sales (using a fourth-quarter sales run rate) Ciena (CIEN - commentary - Cramer's Take) recently said it would pay for ONI Systems (ONIS - commentary - Cramer's Take), which, while in a different business than Sonus, is considered a stronger company than Sonus.

At that same 3.5 times sales, Sonus would fetch $3 a share. And that's a best-case scenario.

Ciena paid a 12% premium to ONI's share price at the acquisition. Back that 12% out of Sonus and you get a stock that should be trading at $2.64 -- and stocks shouldn't be trading at their acquisition price.

That's assuming it gets acquired. A Sonus spokeswoman declined comment. And this note: If Cisco's really interested in buying a company like Sonus, there are a few private companies, if they were for sale, that could be bought for much less.

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Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send any to Herb Greenberg. Greenberg also writes a monthly column for Fortune.

Brian Harris and Mark Martinez assisted with the reporting of this column.