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Infinera and the Advanced Fiber Flashback


Sometimes "caution is preferable to rash bravery."

Sometimes the best laid plans just don't work out. Case in point is Tellabs (TLAB) and its 2004 buyout of Advanced Fiber Communications. At the time AFC was the top dog in Fiber To The Home (FTTH) equipment, it had a fortress of a balance sheet, and it looked ready to take over what we now know would be a huge market. That's why when TLAB snagged AFC for barely a premium to a dirt cheap stock price, more than a few AFC shareholders were more than a bit peeved.
Fast forward to today, and be it TLAB's mismanagement or unforeseen problems with AFC's technology, that buyout looks like a boneheaded move even at that seemingly dirt cheap price. AT&T (T) appears to be bagging TLAB FTTN products (I know that's different than TLAB's FTTH key products, but hardly a reason to fail in the FTTN market), and despite what the article suggests, TLAB's "strong relationship" with Verizon (VZ) for its Fios program is on its proverbial 9th life; dating back to AFC's days as a standalone, AFC products have created more aggravation for VZ than most Tier 1 buyers would typically stand.
My point in all of this is not to dump on TLAB – I was lucky to unload the stock out of exasperation 30% ago – but rather to underscore that turning "cool technology" into a fat bottom line is easier said than done.
In my humble opinion, this is more than a bit pertinent to the discussion Prof. Udall and I have been having over Infinera (INFN). INFN has been getting all kinds of good press of late, its stock performance notwithstanding, a bit like the Rodney Dangerfield of IP networking. INFN's Photonic Integrated Circuit (PIC) technology and its easy scalability within core IP networks is all the rage; and intuitively INFN should be able to penetrate the "metro network" space – where the really big demand boom is happening - by tweaking its software-heavy products. Therefore I am all for putting money behind these kind of story, especially in an environment where "must have technologies" are not so easy to come by.
That said, I have noted INFN's challenges, and the parallels between AFC and INFN when AFC was all the rage, are spooky. As much as it does not mean that the end result must be the same, neither does it follow that INFN is a slam dunk investment.
The stock has been weak since the IPO lock-up expired. Insiders by definition have "insider information", and an IPO is – and should be – a primary way to recover their pre-IPO investment. In my book, such conduct is what confirms that the smart / early money behind a company is indeed smart. But so is making sure that the current selling not morph into an exodus, and that the attractiveness of INFN's business and valuation not turn into a siren song. With respect to the lock-up expiration, note that under the terms of INFN's October secondary offering, INFN's largest shareholders' lock-up period was extended to January 28th, 2008. Hence there is the risk of a second wave of heavy supply at that point. And lastly, there is the issue of the 10 mln shares from the secondary offering, which are 34% under water right now and these shareholders can't be too happy.
There are a lot of moving parts in this story, and while i am bullish and optimistic about it, paraphrasing Shakespeare, sometimes "caution is preferable to rash bravery."
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Position in INFN
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