Selling firm with no sales revisits bad old days

May 08, 2002|By Jay Hancock

NOT SO LONG ago, in an economy far, far away, companies with no profits and no sales were bought and sold for tens of millions of dollars by public shareholders and the corporations they owned.

Those days are mostly gone, but you can relive them Friday at the BWI Marriott in Linthicum.

Corvis Corp.'s annual meeting there is shaping up to be a 1990s nostalgia party, complete with questionable securities analysis and a very rosy view of the future.

What makes the event so last-decade is Corvis' proposed purchase of Dorsal Networks - whose sales and profits equal zero - for $50 million in Corvis stock. Shareholders of Corvis, an unprofitable Columbia fiber-optics company, must approve the deal.

Buying Dorsal, which is less than 2 years old, will give Corvis "a significantly larger addressable market opportunity," says a Corvis regulatory filing.

There is nothing inherently wrong with buying a piece of a company with no revenue. Venture capitalists do it all the time

But the Dorsal deal has upset some Corvis shareholders for several reasons. First, they aren't happy that Corvis stock created to pay off the Dorsal owners will dilute their stake by about 11 percent.

Shareholders also question Corvis' assertion that Dorsal would be a great addition to the business.

Dorsal develops equipment for undersea transmission of fiber-optic signals. Undersea fiber cable is the highly competitive, overbuilt business that made Global Crossing the fine, insolvent company it is today.

Finally, Corvis shareholders are uncomfortable with a potential conflict of interest involving Corvis chief executive David R. Huber.

Huber also is chairman of Dorsal and owns about 31 percent of its stock. Some big institutional shareholders of Corvis see the deal as a desperation ploy by Huber to bail out of a dud investment in Dorsal, which also is based in Columbia.

It's unclear how broad or deep the dissent goes. Several large Corvis shareholders declined to comment.

Raj Rajaratnam, the Galleon Group managing general partner who complained to The Wall Street Journal about the Dorsal deal a few weeks ago, did not return my calls. New York-based Galleon owns about 8 million Corvis shares.

If Corvis' stock price is any indication, however, investors think the Dorsal buyout is a stinker. The stock has fallen by almost half, to $1.21 per share, since the deal was announced in January.

Corvis, which says it negotiated the Dorsal purchase through a special committee of directors, without Huber's involvement, insists the acquisition makes sense. Even though there's too much undersea cable, the market will demand new capacity in two to three years, and the time to start building it is now, says Robert Wohlford, Corvis senior vice president of marketing.

"We saw great promise with the technology and market approach that Dorsal had put together in their infancy," Wohlford said. By buying the company, he added, "we could double our market share for a very small equity investment."

It is a maxim of finance that when corporate officers do business with their own companies in any capacity other than as employees, shareholders should lock the doors and count the silverware.

That said, in the universe of insider deals, the Corvis-Dorsal combination could look a lot worse. No Corvis cash will enter the pockets of Dorsal shareholders; the transaction merely combines the two companies' stock.

Strategically, the deal makes sense. Corvis does optical fiber by land, Dorsal, by sea. Institutional Shareholder Services, a respected adviser to institutional investors, recommended a "yes" vote.

In addition to his shares in Dorsal, Huber owns 23 percent of Corvis. If the Dorsal purchase is that dumb, he'd be sinking his own boat.

Even so, one wonders if Corvis - or anybody - would buy Dorsal if not for Huber's Corvis ties. And the price being paid - 41 million Corvis shares worth about $50 million at yesterday's close - may or may not be a good deal.

Two investment banks, CIBC World Markets and Houlihan Lokey Howard & Zukin, certified to Corvis' board of directors that the price is fair. But in valuing Dorsal - the company with no revenue - they largely relied on financial projections made by Dorsal's own management, according to regulatory filings.

A spokeswoman for Houlihan declined to comment. A spokesman for CIBC did not return my phone calls.

Because Huber and other insiders control so much Corvis stock, the Dorsal buyout is expected to be easily approved.

At the meeting Friday, Corvis shareholders are going to see their equity stake shrink by more than a tenth and hope that Dorsal technology fulfills its promise and that the undersea cable market recovers.

Dorsal shareholders are going to party like it's 1999.

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