Seen Through a Glass Darkly, Corvis IPO Looks Like a Grand Slam

Corvis develops optical-backbone stuff for the Internet. It's planning an IPO this week. What more do you need to know?

Not much, apparently. Investors big and small are short on details of just why Corvis will be such a surefire hit: Information about its technology is hard to come by and it has no revenue. Meanwhile, a lawsuit by rival Ciena (CIEN) threatens to derail the company over intellectual property-rights claims.

But Corvis does have great timing: Nortel's (NT) headlong rise this year illustrates just how hot optical Internet equipment is. And the haze surrounding its technology puts a bit of mystery on Corvis' side. So the average investor stands a slim chance of getting near this stock when it debuts Friday, which should drive it, warts and all, to one of the biggest debuts of the year.

How Does $10 Billion Sound?

The Columbia, Md., company saw the expected price of its shares double Tuesday, to a range of $28 to $30 from $13 to $15. As a result, it is expected to go off with an initial value north of $10 billion.

Corvis could hardly fit the optical-investment thesis more squarely. Known as a long-haul optical-transport designer, it has developed a range of products including amplifiers, multiplexers and switches capable of shooting beams of light from one side of the country to the other more quickly and efficiently than existing systems, say people familiar with the company.

If it can do what its managers promise, it will be formidable. Given the nation's surging data-traffic demands, network-service providers are in a headlong chase for the type of capacity that optical networking can deliver. And with the world's networks trending rapidly from relatively narrow electronic rivulets to vast light-wave pathways, investors are keen on finding new companies heralding this optical revolution.

Smart Money

Corvis was founded by David Huber, who earlier started Ciena, and it's backed by a tech kingmaker, the venture capital firm Kleiner Perkins Caufield & Byers. It also doesn't hurt that Cisco (CSCO) owns nearly 6% of the company.

At least that much is known.

What isn't known is whether what Corvis makes will work with live traffic, and, more important, whether it will sell. Through a sweetheart deal, network operators Broadwing (BRW) and Williams (WCG) agreed to test Corvis equipment with the stipulation that if they like it they will each buy $200 million worth of it within two years. You can't buy that kind of business. Or maybe you can.

In exchange for essentially lending their names to the effort, Williams and Broadwing will split $40 million of Corvis' convertible preferred stock and also have the option to buy up to $5 million of common stock at the initial offering price.

The Lure of Mystery

Another concern is how little is known about the technology, a barrier that has mystified some analysts yet created an attractive aura about the company.

"They have been very tight-lipped about their technology," says one analyst who asked not to be identified. He's with a major Wall Street firm not among the Corvis underwriters.

"They are very freakish and have been very stealthy for the longest time. There is a belief that the more mystique you have, the greater your valuation will be," the analyst says. "That has been a little frustrating for me as an analyst. Yet from what I gather, the technology is nothing that sophisticated or that proprietary."

Then there is the matter of the lawsuit. Last week, Ciena charged Corvis in U.S. District Court in Delaware with infringing on three of its patents, and is seeking damages and an injunction. A Corvis official, citing the pre-IPO quiet period, said he could not comment on the suit.

Lawsuits fly frequently in the networking industry, and rarely are they as devastating as they first appear. But the filing could cloud a rather bright Corvis story, observers say.

But Corvis, optical enigma that it is, would be an IPO home run even in some of the most forbidding of markets. And lately, given the affirmation of demand coming from the likes of Nortel and JDS Uniphase (JDSU), observers are expecting Corvis to be a grand slam.

"You should see a strong jump," says the Wall Street analyst. "Even though the market has been very volatile and choppy, the demand for communications equipment has been very strong."

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