After flying high, some networking stocks have sunk low enough to attract the attention of takeover-minded investors.
Industry pros warn that buying a stock for its takeover potential is always risky. But one way to cushion that risk is to look for smaller companies with hot technologies.
One company that has appeared on the investment takeover radar screen is
(YURI:Nasdaq). Earlier this month the builder of instruments called "ATM access concentrators" went public, selecting an unusual route to the big leagues of network stocks. Most private upstarts, armed with a hot technology, opt to fold into the established firms.
on Jan. 29. Last year,
was gobbled up by
on Nov. 4. In such combinations, the newcomer taps a base of customers and public capital; the big guy adds another product to its lineup.
New networking equipment companies are starting up almost daily, only to be subsequently bought out by another supplier, says Alfred Tobia, an analyst at
. Something similar could happen to Yurie.
"It would be probable to see something like that happen," says David Hold, editor of
The ATM Report
, an industry pub that tracks the services and applications of asynchronous transfer mode, or ATM. As an investor in Yurie, "what you're probably going to end up with is stock" in
or another large supplier.
So far, Yurie is thriving as a stand-alone, and Marketing Vice President Joe Miller said the company has not actively pursued the takeover option. But bigger players are diversifying, constantly adding to their product lines through acquisition, and that makes it tough going for one-product specialists with less public capital at their disposal, according to industry executives. The best bet for Yurie -- and perhaps its investors -- may prove to be a merger.
So far Yurie draws the bulk of its business from federal and local government contracts that are landed through long-distance phone giant
. More diversified rivals such as Cascade and 3Com will compete for, and probably win, other big contracts. While Yurie's technology, protected in part by patents, breaks promising ground, the company needs to spread its customer base rapidly to keep pace with the entrenched competitors.
On Feb. 5 Yurie issued 4 million common shares (of 24.6 million outstanding) at $12 apiece, in a deal underwritten by
Wessels Arnold & Henderson
. While the stock bounced as high as 15 1/8 on Feb. 12, it has settled since, closing down 1 1/4 at 13 1/4 Friday. That sets the market cap at $326 million.
Networking is dominated by perhaps five or six large suppliers, which boast the sales channels and brand-name clout to land large national and international accounts. Experts widely agree that this model is the key to success -- Cisco, whose market cap dwarfs those of its largest rivals combined, remains the industry favorite. And they laud its ability to buy any product that threatens their business.
Yurie's latest product, the LDR200, may be one of those. It sends data bits through long-distance networks of copper wire via ATM. While that's been done before with so-called local-area networks, Yurie is taking the lead in stretching that technology into longer-haul systems. Phone companies are charmed by the concept, because it allows them to deploy lightning-fast ATM systems without tearing their copper lines out of the ground and installing fiber-optics instead.
And given their sometimes antiquated (read: copper) systems, government agencies also like the idea. They are the customers that provide Yurie with its bread and butter so far. Under a three-year, $26.5 million contract with AT&T, extending through 1998, Yurie is marketing its gear to federal, state and local governments. That partnership accounted for 91% of its revenue in the first nine months of 1996.
To extend that customer base in the public sector, Yurie boasts some big-name connections -- R. James Woolsey, former director of the
Central Intelligence Agency
, and William Perry, who served as secretary of defense, both sit on Yurie's board.
Miller, Yurie's vice president of marketing, says the company is pushing harder to expand its fledgling private-sector business. He added that his company's ATM operations are more well-developed than other startups that chose to merge, but declined to be more specific.
But experts in this industry say that the most lucrative corporate customers really prefer to deal with a single, established supplier when procuring network equipment. As a stand-alone, Yurie is unlikely to rival the marketing clout of Cisco. As an arm of Cisco, it could thrive.
By Kevin Petrie