SAN FRANCISCO --
Advanced Fibre Communications
may not see a boost in business from its 5.5% stake in
, but it may win more investor applause when the start-up goes public.
Cerent subleases offices from AFC in Petaluma, Calif. That degree of proximity doesn't extend into their respective businesses, however. Cerent's boxes, which younger carriers use to plug voice and data calls into the widest network pipes, aren't closely tied to AFC's products, which allow older phone carriers to pack more customers onto their local networks. But analysts expect Cerent's IPO, which will likely come later this summer, to add $150 million or more to AFC's market capitalization of $1.1 billion and give it cash to expand its business, perhaps through acquisitions.
"It's really more of a cash investment for them," says analyst Chandan Sarkar with
, an investment bank in Stanford, Conn. SoundView has no banking relationship with either company.
Cerent, citing an
-enforced quiet period, declined to comment for this story. AFC officials didn't answer any questions about its investments or make executives available for interviews.
It's All About Cash
Corporations are finding that the kind of me-too venture capitalism AFC is testing with Cerent pays off, whether the startup becomes a useful partner or not. When
in a stock transaction, Cisco rival
year-old investment in Fibex turned into $100 million in Cisco stock. According to an SEC filing last month, Ascend may sell those shares into the open market.
Many in the technology and venture-capital industry expect to see more corporations invest in start-ups, regardless of whether they make good partners.
"We're seeing all kinds of corporate investors these days," compared to just two or three years ago, says general partner Promod Haque with
, an investor in Cerent. SEC rules restricted Haque, also a director of Cerent, from discussing Cerent in particular. However, he says he encourages start-ups to enlist both VC firms and corporations as backers. "Sometimes it can give you perspectives on strategies that other corporations are employing," he says.
A Jewel Called Cerent
In addition to the undisclosed amount that AFC invested in Cerent in September 1998, AFC Chairman Don Green sits on Cerent's board. And two former AFC execs have signed with Cerent since the company was founded in January 1997.
Now Cerent is planning to raise $100 million in an IPO that
Credit Suisse First Boston
is underwriting. Cerent doesn't state its market capitalization in its initial SEC documents. But judging from the recent performance of networking IPOs such as
, Cerent could easily top AFC in dollar market value once it goes public.
Cerent, which started shipping commercial product in early 1999, posted revenue of $9.9 million and a net loss of $29.3 million in the first six months of this year, compared with an $8.7 million loss a year earlier. AFC, by contrast, posted second-quarter revenue of $68.8 million, down 19% from the same quarter a year before; and a $4.5 million net profit excluding a restructuring charge, down from a $7.2 million profit a year ago.
And while Cerent expects to lose money for the foreseeable future, its promising contracts with high-profile carriers such as
could boost revenue and enhance its image on Wall Street in coming quarters.
After cresting at 44 3/4 in April 1998, Advanced Fibre sunk to 4 by last October thanks partly to curbed spending plans by international carriers and lost business with
. Since then, a long-anticipated contract with Baby Bell
has nudged the stock back up to 16 3/16 at Tuesday's close.
Only now is Wall Street starting to size up the Cerent jewels. Analyst Conrad Leifur with
US Bancorp Piper Jaffray
upgraded Advanced Fibre to buy on July 20, citing the SBC contract, the recent hire of telecom veteran John Schofield as CEO and the planned Cerent IPO.
"AFC's stake in Cerent could be worth $150 million or more, roughly $2 per
AFC share," wrote Leifur in his report, when AFC was trading at 15 3/16. For comparison, AFC now counts $143.2 million in cash, cash equivalents and marketable securities. Initial SEC filings do not state whether AFC will sell shares in the offering, but Leifur sees little technological cooperation between the companies and expects AFC to take profits.
"The eventual monetization of its Cerent stake would enhance AFC's ability to pursue the acquisition strategy that is part of Schofeld's game plan," Leifur says. He did not comment further. Piper Jaffray has no underwriting or banking ties to either company.
One potential acquisition target, according to an equity analyst who asked not to be named, is
, a yearling in Santa Clara, Calif., that in June started shipping bandwidth-boosting network systems to carriers. Anda couldn't be reached for comment.
Regardless, AFC can use proceeds from the sale of its Cerent stake to expand its wallet considerably while continuing its own turnaround effort. One Silicon Valley CFO, who asked not to be named, says numerous small companies such as AFC are making these minority investments without having to disclose them to investors.
"It's so cheap that they can make a bet and then write it off," says the CFO. Investors learn of the investment if it blooms and becomes material. "You only have to have one success to justify all the others," the CFO says.