A glaring hole in networking giant Nortel's (NYSE:NT) product line is great news for obscure Avici Systems (NASDAQ:AVCI). After signing a mega deal with Verizon (NYSE:VZ), Nortel announced a three-year strategic agreement with Avici to integrate, sell, and support its core IP routers. This will be critical for the new voice over Internet Protocol (VOIP) networks.
Previously, Nortel relied on Juniper's (NASDAQ:JNPR) solutions. However, Nortel wanted more control over the technology and probably didn't like the fact that Juniper sells to its enemies, including Siemens AG (NYSE:SI) and Lucent (NYSE:LU).
Despite yesterday's nearly 30% surge, Avici is a tiny company, with an enterprise value of roughly $100 million (if you subtract the $60 million in cash from the market cap). With a current run rate of about $50 million in revenues, the stock trades at about two times sales, which seems pretty cheap considering the potential impact of the Nortel deal.
From here, along with Nortel, Avici will ride the coattails of carrier deals. Having Nortel with you on a sales call can't be a bad thing, but remember, Avici will likely not see any new revenues for six months or so. It does, after all, take time to make these deals happen.
One final twist: As part of the deal, Nortel gets a warrant to buy 800,000 shares of Avici stock at $8 a pop -- which, with the stock at $13 and change, is already well in the money. You never know how these things work out, but if things proceed smoothly, don't be surprised if Nortel winds up buying Avici somewhere down the road.
Tom Taulli is the author of six books on investing, such as Investing in IPOs (Bloomberg Press), as well as a professor of finance at the USC School of Business (don't worry, but he does come out of his ivory tower). You can reach him at [email protected].
