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Sycamore buys Sirocco
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June 6, 2000: 3:19 p.m. ET
Fiber-optic equipment maker acquires switch maker for $2.9B in stock
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NEW YORK (CNNfn) - Optical networking provider Sycamore Networks Inc. said Tuesday it is acquiring privately held optical switching maker Sirocco Systems Inc. for $2.9 billion in stock.
Terms call for Chelmsford, Mass.-based Sycamore to exchange 28 million of its shares for all outstanding shares of Wallingford, Conn.-based Sirocco. The purchase is valued at $2.9 billion, based on Sycamore's (SCMR: Research, Estimates) closing stock price Monday of 102-15/16. The deal, approved both companies' boards, still requires regulatory approval and is slated to close during Sycamore's fiscal first quarter, ending Oct. 31.
 Shares of Sycamore gained 9/16 to 103-1/2 in early afternoon trading Tuesday.
Sirocco reportedly was Sycamore's second choice as an acquisition. Sycamore wanted to buy optical equipment maker Chromatis Networks in its bid to further its reach in metro access, but Lucent (LU: Research, Estimates) outbid it in an acquisition worth $4.65 billion.
Sirocco makes equipment for the optical access market, connecting existing telecommunications switches and lines to the high-speed optical switches produced by Sycamore, which the company will use in the metro access market.
Sirocco began operations in January 1999 and expects to start field trials of its optical communications equipment in the fourth calendar quarter, in late June or early July, with more in-depth trials slated for the fall.
Sirocco's switches cost about half as much as the equipment Sycamore makes and are aimed at smaller networks. Analysts said they believe Sirocco's products will complement Sycamore equipment that is geared to larger networks.
While Sirocco has no sales, it does have is the capacity to manufacture smaller switches for distribution in areas where Sycamore is lacking right now, targeting urban areas, such as apartment buildings where it can reach Internet users dialing into the Web and also using cell phones to connect online.
Credit Suisse First Boston analyst James Parmalee said Sirocco anticipates sending out first customer shipments by the end of calendar year 2000, and expects significant revenue contribution by fiscal year 2001.
Parmalee reiterated his "buy" rating on Sycamore stock Tuesday, with a 12-month price target of $102 a share. The company has a market capitalization of $24.3 billion.
Sycamore develops and provides technology that allows speedier transmission of content through networks. Its optical networking products transport voice and data traffic using light waves and offer network service providers the ability to boost bandwidth by upgrading existing fiber-optic networks. The company specializes in making optical switches with electrical cores and competes with such rivals including: Ciena Corp. (CIEN: Research, Estimates), which recently acquired Lightera; Cisco Systems (CSCO: Research, Estimates), which recently bought Monterey; and Tellium.
Sycamore clients include telecom service providers, Internet service providers, and cable operators. The company went public in October 1999, priced at $38 a share and ended trading on its first day at 184-3/4, up 386 percent.
In May, Sycamore turned in first quarter earnings of $11.7 million, or 5 cents a share, beating the consensus estimate from First Call by a penny.
"We view the acquisition as positive as it expands Sycamore's offering in the edge access market and is complimentary to Sycamore's product family," said CSFB's Parmalee in a research note. "We believe near-term dilution will be largely offset by upside in Sycamore's core business."
Recently, the optical networking market has seen a spate of deals, as companies have snapped up optical-related firms to gain a foothold in the emerging business. On June 1, ONI Systems Corp. (ONIS: Research, Estimates), formerly Optical Networks, an optical networking equipment provider, made its Wall Street debut, and its shares soared 57-9/16, or 230 percent, to 82-9/16, from their opening price of $25.
Other recent deals include Lucent (LU: Research, Estimates) buying the rest of Chromatis Networks for $4.65 billion; Cisco's Monterey purchase, and Nortel Networks' (NOR: Research, Estimates) recently completed acquisition of Xros Inc. and CoreTek.
Researchers at Pioneer Consulting estimates that the Global Optical Networks Edge market, which includes next-generation SONET, metro DWDM, converged metro optical platforms, and metro optical IP systems is expected to grow to $17.3 billion by 2004.
Jonathan Reeves, Sirocco's president and CEO, will be vice president and general manager of Sycamore's newly created optical access division, and will report to Sycamore President and CEO Dan Smith. All employees of Sirocco will become Sycamore employees. 
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