These days, companies like
( AVCI) have viable products and great technologies, but no demand.
All three companies developed cutting-edge telecommunications technologies focusing on the core of the network -- exactly the place where no money is being spent. Once cherished by investors, these fallen stars are having a tough time trying to shine because no one is buying their products. Let's take 'em one by one.
Corvis has the best long-haul platform, which carries voice and data information over long distances, but it came late to the party. By the time its long-haul platform was ready, next-generation long-haul carriers like
( GX) and
had pretty much completed their buildouts and/or had committed to other platforms.
And Corvis' platform is just that: a platform. It's not like the overbuilders can buy a single switch here or there to throw into their networks. They're either going to buy the Corvis platform or they're not. Because different platforms can factor into the entire design of the network -- and these carriers had plowed their not-so-hard-earned billions into
( NT) and Sycamore's long-haul platforms -- just about everyone but
( BRW) chose the latter.
Avici has some of the best routers in the business, but, like Corvis, it got its products out
too late. I've
written before about Avici's problems trying to compete with
, two of the very best-run companies in telecom. It ain't getting any easier.
Sycamore is a bit of a different animal. It wasn't late to the game -- in fact, its long-haul switches were available during warm-ups, as the long-haul carriers were raising their billions and laying out route scenarios. The company went public and immediately began blowing away the Street's estimates, turning profitable before I thought it could. Alas, Sycamore's profitability disappeared along with the market caps of
, as I
had said long ago that 360's problems (read: disasters) would wreak havoc on Sycamore's revenue.
Other Common Factors
Besides having great technologies and viable products, these companies have at least a few other things in common: nice balance sheets, but no chance of near-term (or intermediate-term) profitability. Corvis has $2.22 a share in cash, while Avici has $3.40 and Sycamore has $3.37. None of the companies has any significant debt. The question is then (and boy, don't I know it from all the emails), why don't I include them in my recent recommendations?
The target markets of these companies have all but collapsed, with no chance of turning around anytime soon. That makes it highly unlikely that these companies will be able to turn around their own prospects. Too many questions exist about the viability of these companies' businesses, the viability of their technologies notwithstanding. While companies like
( TLAB) and
( AFCI) continue to have some (admittedly limited) visibility into demand, that comes mostly from essentially the only rich carriers in the U.S. -- the incumbent local exchange carriers -- exactly the type of customers that Corvis, Avici and Sycamore don't have enough of.
Sycamore and Corvis do make somewhat attractive acquisition targets. Tellabs has been out scouting potential matches, and whether it finds the right partner is up in the air; a Tellabs-Sycamore combination wouldn't shock me. By linking up with Sycamore, Tellabs would gain a foothold into optical switching to complement its optical cross-connect product line.
( LU) former suitor, is a possible match for Corvis, because Corvis' technology would fit nicely into Alcatel's product line. However, this combination would still leave Alcatel
needing a better suite of customers.
Cisco, of course, remains a likely suitor for downtrodden vendors and could have an interest in Sycamore, although I believe Ciena or companies in the storage sector (as reported in a recent UBS Warburg report) would be a more likely scenario. Cisco would be more interested in gaining the bigger market share of Ciena, even with its higher price tag.
Avici, unfortunately for shareholders, would be a difficult acquisition for most anyone to utilize, as Nortel, Lucent and every other vendor besides the anomalous Juniper have the scars (and losses and writedowns) from trying to take on Cisco.
I wouldn't buy any of these companies in hopes of cashing out on an acquisition -- particularly when there are profitable (or soon-to-be profitable) companies
out there trading at similar values that you can buy for
investment purposes rather than acquisition-gambling purposes -- but such possibilities do exist.
Cody Willard is president of TelEconomics Consulting, a financial and technology consulting firm. He is also founder of
TelEconomics.com, a Web site devoted to news and analysis of telecommunications stocks. Previously, he was senior analyst for a venture development company, and before that was a partner at the Lanyi Research division of CIBC World Markets. At time of publication, Willard had no positions in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Willard appreciates your feedback and invites you to send it to