Deshpande's Sycamore Skyrockets's on IPO  

By: Alex Pham
Source: Boston Globe; October 23, 1999

Sycamore Networks Inc., a tiny Chelmsford, Mass. company with just two customers, set Wall Street on fire Friday with its initial public offering of stock, as its share price exploded fivefold, from an offer price of $38 to a close of $184.75.

That makes Sycamore, a manufacturer of fiber-optic network products for carrying Internet traffic, worth $14.4 billion, setting a record for the highest market value achieved by an Internet company in its first day of trading.

Sycamore, a company with little more than $11 million in revenue since it was founded in February last year, has two customers and shipped its first product in May. It has lost more than $20 million but has a much higher market value than the $9.5 billion of 3Com Corp., a larger and older maker of communications equipment.

Sycamore's opening price of $270.88, the day's high, was a 613 percent gain from its offer price, making it the biggest opening price in IPO history.

"People are buying the hell out of this stock,'' said Steven Tuen, director of research for IPO Value Monitor in New York. ``It's just amazing.''

The Sycamore stock frenzy was driven mostly by individual investors, eager to get in on a company that is expected to develop the next generation of communications equipment. Much of the trading Friday was in smaller blocks of 100 to 200 shares, Tuen noted, an indication that large institutional investors weren't the only buyers. Individual investors ``don't want to miss out on the opportunity,'' he said.

In fact, small investors did miss out on most of the profit. The only people allowed to buy into the 7.5 million shares offered at $38 were large customers of Morgan Stanley Dean Witter, the offering's underwriter.

The market exuberance over Sycamore is just the latest in a string of record-setting initial public offerings of Internet-related companies, demonstrating an almost insatiable demand for a relatively limited supply of such stock.

It also highlights a hot new area in high tech: Internet infrastructure, the physical building blocks that allow unprecedented numbers of people to pipe into the Internet.

Companies similar to Sycamore also have logged impressive IPOs in recent months, including Juniper Networks Inc. of Mountain View, which started at $34 a share in June and closed Friday at $261.75. Foundry Networks Inc. of Sunnyvale went public at $25 a share and closed Friday at $162.81.

"Just like 20 years ago when the economy was driven by oil, the economy for the next 25 years will be driven by the networked economy,'' said Desh Deshpande, who founded Sycamore with Daniel E. Smith just 18 months ago.

Deshpande and Smith are now billionaires, at least on paper. Deshpande, who owns 16.3 million Sycamore shares, is worth just under $3 billion, while Smith's 14.7 million shares are worth about $2.7 billion. The two, however, cannot cash in on their stock for at least six months, when a ``lock-up period'' expires.

For now, Deshpande and Smith can claim to have launched one of the most successful IPOs in history. Its 386 percent gain is the fourth highest in the first day of trading for an IPO. On an absolute dollar basis, Sycamore's increase of $146.75 is the largest ever first-day gain, said Jay Ritter, professor of finance at the University of Florida. Its market capitalization -- $14 billion -- is also the highest realized by a company on its stock market debut.

Few are predicting whether there will be a hangover next week from the Sycamore IPO, mostly because there are few precedents to help set a course.

Nevertheless, many high-tech observers are bullish on Sycamore's future as a company. Some are taking their cues from Cisco Systems Inc., which in August paid $7 billion for Cerent Corp., a maker of fiber-optic products. Others are noting that Deshpande and Smith are proven entrepreneurs and managers, having built Cascade Communications into a telecommunications powerhouse that was sold for $3.7 billion in 1997.

"Part of what makes Sycamore so hot is that Cisco has declared the area to be hot'' with its purchase of Cerent, said Joseph P. Lassiter, professor of management at the Harvard Business School. ``But it's also because Dan and Desh have proven they know how to run a company, not just build a prototype and sell it off. The market is now saying it loves them, and that's huge.''

Others, however, are more skeptical about Sycamore's $14 billion valuation, larger than the $9.9 billion market capitalization of defense contractor Raytheon Co., which has $20 billion in annual revenue.

Ritter noted that Sycamore has stiff competition, not only from well-established companies such as Cisco, Nortel Networks Corp., Lucent Technologies Inc., and Ciena Corp., but also from newer firms such as Redback Networks in Sunnyvale, Juniper, and Foundry.

"Competition will make it difficult for any one of these companies to make really big profits,'' Ritter said. ``If one of them had a monopoly, it would be easier to justify these valuations.''