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Networking companies take wild ride on public markets

In 1999, networking IPOs gained an average of 460 percent from their offer prices, while this year they gained an average of just 5 percent.

For networking equipment start-ups, 1999 was a tough act to follow.

Encouraged by the stellar successes in 1999 of companies such as Sycamore Networks, Juniper Networks and Foundry Networks, dozens of telecommunications gear makers sprang forth this year hoping to duplicate the investor enthusiasm for their newly public predecessors.

Year in
review special report After all, demand for communications, fiber-optic and wireless equipment was exploding and, as a result, most equipment manufacturers were red-hot commodities on Wall Street. The frenzy was based on the notion that the Internet explosion was forcing network operators to buy as much new equipment as they could to keep up with demand.

"Last year was just an incredible year. The investor sentiment last year was very high," said Paul Bard, a research analyst at Greenwich, Conn.-based Renaissance Capital, which manages the IPO Plus Aftermarket Fund. "The growth potential is huge, which is why investors love these (communications equipment) stocks."

But the same zeal that prompted some companies to make initial public stock offerings--even before earning their first revenues--quickly faded. Although the communications equipment sector is growing, enthusiasm has been curbed, resulting in a feeble year for communications gear IPOs--at least compared with last year's bumper crop of strong performers.

Impotent IPOs In 1999, networking IPOs gained an average of 460 percent from their offer prices, while telecommunications equipment IPOs averaged returns of 240 percent, as calculated by CommScan, a New York-based investment research firm. However, networking IPOs this year have gained an average of just 5 percent and new telecommunications equipment stocks are down 19 percent on average, CommScan said.

"The momentum that really spurred 1999 spilled over into 2000, even into the third quarter," Bard said. "But those stocks fell victim to the concerns about reduced capital spending, especially among the newer service providers who are usually the first to adopt new technology."

Communications gear makers were not the only ones to face lackluster IPO performances this year. According to Renaissance Capital, IPOs in 2000 declined an average 7 percent from their offer prices.

Still, the sheer demand for high-speed Internet connections, wireless data services and other advanced communications created a frenzy as investors crowned several communications equipment companies last year.

For example, Extreme Networks' shares nearly tripled in April 1999. Juniper stock spiked 200 percent in June 1999, and Sycamore shares nearly quintupled in October later that year. Redback Networks, Copper Mountain Networks and Foundry, among others, also had strong IPOs in 1999.

This year wasn't as kind, however.

Although companies such as ONI Systems, Sonus Networks, Corvis and Avici Systems had strong IPOs earlier this year, most of these gear makers' shares are now significantly lower.

Others to go public this year included Turnstone Systems, Stratos Lightwave, Accelerated Networks, CoSine Communications and optical component makers Oplink Communications, Alliance Fiber Optic and Cidra.

Even some industry executives admit that gear makers, particularly optical networking start-ups, were overvalued.

"The optical space in general, not just related to the class of 2000, is overheated," said Dean Hamilton, chief executive at CoSine Communications, a broadband networking equipment start-up that went public in September. "It would shock me if you had the same showing that you've had in 1999 and 2000. It's saturated."

The blame can be assigned to several factors, including a slowing economy, a shortage of investment capital, and expectations that were too lofty. More specifically, the downturn in communications capital spending, as well as earnings warnings and concerns about slower growth in optics, has hurt several smaller companies.

In a recent example, Foundry shares were pounded after the company warned that fourth-quarter earnings would fail to meet expectations.

But some analysts say optical networking companies remain strong, and that their depressed prices make them attractive for investors.

Network building must go on
"We expect optical networking companies to report strong quarterly results," U.S. Bancorp Piper Jaffray equity analyst Conrad Leifur said in a recent report. "Once again we expect nearly every company to exceed our published estimates as underlying demand for optical networking systems and components has remained robust."

Indeed, despite the communications equipment downturn, many investors believe that communications infrastructure companies are bound to be solid long-term investments.

See 2000 timeline "There is a belief that the optical sector is almost immune from the capital spending downturn because the network buildout must go on," CoSine's Hamilton said. "These companies have strong products and they're positioned nicely. That upgrade will continue."

Despite the long-term optimism, some analysts don't expect the overall IPO market to bounce back until the second or third quarter of 2001. "People are fleeing from even the big names like Cisco Systems, Nortel Networks and Lucent Technologies," Bard said. "So we really won't see a turnaround until the Fed cuts rates and the economy turns around."