So, you're the CEO of an energetic young telecommunications company. You've just launched a very successful IPO, raising $122 million, and you watched the shares of your bundle of joy surge 67% from its offering price in the first day of trading. Naturally, the only thing left to do now is, well, uh ... quit. And then, for kicks, you might as well start up a new company and become bitter rivals. We've all been there, done that. Right?
If this story sounds at all autobiographical, you're probably David Huber, Ph.D., the former CEO of Ciena Corporation (Nasdaq: CIEN) and current Chairman, President, and CEO of Corvis Corporation (Nasdaq: CORV). Pleased to meet you, David. You've been busy these last couple years.
As you might recall from our introduction of Ciena a few weeks back, an ongoing spat with Ciena's management team prompted Huber to abandon ship just five years after forming the company. Rather than becoming a castaway somewhere in the South Pacific, Dr. Huber landed safely ashore close to home in Columbia, MD, created Corvis, a direct rival to Ciena, and promptly introduced his company's corporate attorneys to those of his former company, spawning what promises to be a lengthy series of nasty legal volleys.
Fire and ice and liquid nitrogen
In late July of 2000, the much-anticipated IPO of optical networking startup Corvis Corporation hit the market already ablaze, touching $98 a share during the day before closing at $84, more than double its IPO price of $36. A month later, after being tossed around in the $80 to $100 range, the stock closed on August 31 at $103 and change. Corvis was on fire in the final days of summer.
Then came the fall. Literally. Things got ugly. Sector-wide concerns over a possible slowdown in telecommunication carrier capital expenditure took its toll on the majority of optical networking companies. Corvis was not immune. By November 8, 2000 the stock had been cut in half to $45.
Industry-leading Nortel Networks (NYSE: NT), which had been particularly stricken by pessimism, issued a strong denial. Its revenues were on track. The quarter would be fine. The year was looking strong as well. But then, a rumor surfaced suggesting that Nortel had lost a major customer.
It was Qwest Communications (NYSE: Q) that bailed on Nortel. It was instead hooking up with rival Ciena Corp. This couldn't be good.
Wait. No. Different rumor. It was instead Lucent (NYSE: LU) that had lost Qwest to Ciena. This wasn't good, still.
No. Wait. It's worse. It was Corvis that had lost an account to Ciena. This was far worse.
Wait again. It was Broadwing, Inc. (NYSE: BRW) that had skipped out on Corvis. That was especially bad, seeing how it was a key customer.
Before it was over, Elvis had been seen playing Beatles albums backward. The story, in a multitude of forms, was out. Even if no one was exactly clear on what the story was, surely it had to be bad. To complicate matters, Corvis was mum on the subject. The company tends to keep its hand very close to the vest regarding its customers. Broadwing also declined comment, further fanning the flames of gossip.
James Parmelee of Credit Suisse First Boston did show his cards. "We would characterize the view that Corvis lost a customer as unfounded," Parmelee said in a bulletin issued to clients. CSFB managed the Corvis IPO and has remained a strong supporter of the company.
The result of all this speculation and uncertainty, along with the current market disfavor for once high-flying technology stocks, was that Corvis, the white-hot summer IPO, was now trading below its offering price and recently landed as low as $19.50 a share, giving it an $8 billion market value.
Thin float, fat cap
If Corvis seems rather volatile, it's not at all surprising. Its float (or number of shares available for trade) is incredibly thin, with 91% of the shares still held by insiders. These insiders are prevented by SEC rules from selling their shares on the market at this time, leaving comparatively few shares left to be cast to and fro in daily trading. It doesn't take much to move a stock in either direction when it has a float of 30 million shares and trades 5% of that entire float on an average day. Corvis has stated that it expected insider shares to begin to be unlocked this month.
The market is also casting a skeptical eye toward the company's price-to-sales ratio, which has varied from high to astronomical in the company's brief history. Consider that in the company's quarter ended Sept. 30, 2000, Corvis recorded sales of $22.9 million. The market cap at that time was about $25 billion, leaving a price-to-sales of roughly 1,000. At least $300 million in sales is expected in 2001, with continued losses expected until at least 2002.
Enough of the doom and gloom for now. Next week we'll pick up with what Corvis is doing and doing well.
-- Vince Hanks, TMF Elwood on the Fool discussion boards.