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Company Perspectives:
Broadwing Corporation is the parent company of Broadwing Communications, LLC, an innovative telecommunications service provider, and Corvis Equipment Corporation, a developer of advanced optical networking equipment selling primarily to the U.S. government.
Broadwing Corporation operates two divisions that serve different segments of the telecommunications industry. The communications division, managed by the Broadwing Communications, LLC subsidiary, is a provider of data, internet, voice, and broadband transport services to carrier and enterprise customers delivered over a nationwide network connecting 137 cities. The communications equipment division, operating under Corvis Equipment Corporation, designs, manufactures, and sells high performance all-optical and electrical/optical communications systems. In response to the severe downturn in the telecommunications industry, the company shifted its focus to become primarily a provider of communications services, which comprises about 99 percent of its revenue.
Origins
Broadwing Corporation is the result of the acquisition by Corvis Corporation of Broadwing Communications Services Inc. and Corvis's subsequent reorganization under the Broadwing name. Corvis was founded in 1997 by David R. Huber, a physicist and technology pioneer. Huber was raised in the small town of Le Grange, Oregon, known for its railroad and lumber. His father was a county agent and ran the local 4-H club. His mother was a school teacher. Huber received a B.S. in physics at Eastern Oregon University and earned his Ph.D. in electrical engineering from Brigham Young University. From 1989 to 1992, he held research and development positions in optical communications at Rockwell International Corporation, Optelecom, Inc., and ITT Industries, Inc.
In 1992, Huber founded Ciena Corporation, an innovator of gear that enabled major telephone companies to increase the capacity of their networks to carry telephone calls and internet messages. Ciena's innovations in fiber optics caused a scramble among major telephone carriers for its products, making the start-up one of the fastest growing firms in American economic history. The company shattered financial records for new start-ups after its February 1997 initial public offering raised $3.4 billion and first-year sales totaled $195 million. With Ciena's rise to international prominence, Huber, the start-up's chief scientist at the time, quarreled with chief executive Patrick H. Nettles and the company's board of directors over the company's future direction. Huber wanted to pursue optical technology, which Ciena's top management and board would not endorse. In a bid for more independence, Huber also wanted to report directly to the board rather than to Nettles. In May 1997, Huber left Ciena with $300 million worth of the company's stock. In June of that year, he founded Nova Technologies, Inc. to develop the world's first all-optical network.
Corvis's Meteoric Rise
By February 1999, Huber had renamed his new firm Corvis Corporation and already had 96 employees, with plans to employ 1,500 by 2001. Corvis also launched a major building spree, constructing a 60,000 square-foot building in Columbia, Maryland in addition to signing a lease on another 100,000 square foot facility. With backing from venture capital firms, Cisco Systems, and his own investment, Huber raised tens of millions to reenter a business that was potentially worth billions for the company that could lower data transmission costs. At the time, major long-distance carriers, including MCI WorldCom and AT&T, were spending huge sums converting data from light to electricity as it passed through switches that directed this traffic to various end points. Because switches were technologically indispensable, the goal was not to eliminate them but to improve their efficiency. In 1999, data traffic exceeded voice transmissions for the first time, threatening revenues as data was less profitable. As a result, lowering transmission costs became increasingly important, especially as the electrical conversion at the switches accounted for about 75 percent of the total cost of transmitting traffic. Huber's innovations eliminated this cost with an all optical network that could carry more powerful optical signals. Although typical optical signals could travel up to 600 kilometers before degrading, Corvis's network could transmit vastly more data up to 3,200 kilometers. Corvis also developed an optical switch, thereby eliminating the need for converting light to electricity. With an eye on competitors that were also developing optical networks, Huber shrouded his company's operations in secrecy. Corvis did not have a Web site until 1999 and investment analysts were required to sign non-disclosure agreements before talking to company officials. In December 1999, Corvis raised another $215 million in venture capital, increasing its total funding to $300 million, to expand manufacturing capacity and hire 200 additional employees over the next year. In addition, although Corvis had yet to generate revenue, four fiber optic networks (Sprint, Quest, Williams, and Broadwing Inc.) began field tests of its all-optical long distance and switching equipment for a total of $35 million to $40 million. The deals offered potentially lucrative follow-up orders.
By the beginning of 2000, Corvis meteoric rise caught the attention of Cisco, Lucent Technologies, and Nortel, each of which wooed the start-up with acquisition offers. In April 2000, Corvis won its first customer in Austin-based Broadwing Communications Inc., a wholly owned subsidiary of Broadwing Inc. of Cincinnati, Ohio, for optical services in the exploding broadband market. After only weeks of testing, Broadwing Communications signed a two-year $200 million deal to deploy Corvis's gear across its nationwide network to offer bandwidth on demand and higher bandwidth capacity to customers at lower costs. Broadwing expected the new gear to increase its network capacity by 400 percent, cut costs by more than 50 percent, and reduce time to install new customer service by up to 70 percent. The agreement made Corvis the first to go to market with an all-optical long distance and routing system, signifying a milestone in the company's development. Corvis quickly landed another $200 million optical equipment deal with Williams Communications Inc., which operated a 33,000-mile nationwide network providing voice, video, and data products and services. In June 2000, Corvis announced a third multi-year deal with Quest Communications International Inc. for its ultra-fast optical networking gear.
In May 2000, Corvis announced it was seeking to raise $400 million in an initial public stock offering to cover sales and marketing costs, as well as expenses related to research and development. By April 2000, the company had raised $346.1 million in venture capital and other funding. At the same time, Corvis began a program of acquisitions, purchasing Algety Telecom, a French telecommunications equipment maker, and Baylight Networks, a designer of optical network access systems. Corvis announced its acquisition of Algety in May 2000 and Baylight one month later. In July 2000, fiber optics rival Ciena filed a patent infringement suit against Corvis, an action that endangered Corvis's plans to go public. In U.S. District Court for the District of Delaware, Ciena accused Corvis of infringing on three technology patents and sought an injunction and damages in the lawsuit. The patent suit nevertheless had no effect on Corvis's July public offering. Originally hoping for a $400 million public offering, Corvis instead raised $1.14 billion after boosting its asking price for its stock from $13 to $36 a share and the size of its offering from 27.5 million to 31.6 million shares. The company increased the price and number of shares in response to the mania surrounding its offering as prospective investors swamped investment bankers with orders. The offering was the largest for a company that had yet to report any revenues. In the first day of trading, shares of Corvis shot up 135 percent despite the broad technology sell-off occurring at the time. The company's shares shot up to $98 before closing at $84.71 on NASDAQ volume of almost 28 million shares, putting Corvis's value on paper at more than $28 billion after one day. Several days later, Corvis boasted a market capitalization of $38 billion, making it more valuable than General Motors. The offering also made company founder David Huber a billionaire, at least on paper, with 22 million common shares worth more than $1.86 billion.
The Collapse of the Telecom Market
In early October 2000, in its first earnings report as a public company, Corvis posted third-quarter revenue of $22.9 million and a net loss of $66.4 million. Wall Street investors anticipated Corvis's sales would rocket to $310 million in 2001, but a sell-off in the shares of Nortel, a market leader, foreshadowed the collapse of the telecom industry. Nortel's shares dived 29 percent when its earnings failed to meet Wall Street's hyper-inflated expectations, sparking reverberations across the industry. In late November 2000, Shares in Corvis sank to $28 from $50 in five days, a far cry from its high of $114.75 in August. By the end of February 2001, Corvis's fortunes were plummeting as investor zeal for optics cooled and its stock sank to $11.88 a share. Shares of all telecom equipment makers were in a free-fall as companies that bought their equipment began cutting back on capital spending. The market value of Corvis's stock dropped more than $4 billion, and the company's total value plunged $30 billion from its peak in the summer of 2000. With its shares faltering in the markets, Corvis needed to conserve cash and backed away from its 100,000 square-foot expansion at a business park in Columbia, Maryland. In addition, in May 2001 Corvis cut 250 positions and later reorganized its Canadian operations, resulting in additional job losses. With the value of its shares collapsing, between May 7 and June 15, 2001, Corvis became the subject of nine class action lawsuits alleging misrepresentation relating to its initial public offering. In the three months ended June 2001, Corvis reported a loss of $821.8 million, and by the end of August its shares closed at $1.97.
Amidst these punishing reversals, Corvis consummated deals with Telefonica SA, a telecommunications firm in Spain and Latin America, and with another, unnamed, major global carrier. In January 2002, Corvis also signed a merger agreement to acquire Dorsal Networks, a privately held provider of transoceanic and regional undersea optical network systems, in a stock transaction for about 40 million shares of Corvis stock, worth approximately $90 million. However, with revenue down 95 percent, all five of its customers in financial trouble, its stock price hovering around $1.00 a share, repeated workforce reductions, and most of the original management gone, David Huber could make little headway in an industry that had glutted the market and set the stage for ruinous price cutting. Nonetheless, by August 2002 Corvis still had $580 million in cash and near cash, enough to operate for five years. In October 2002, Corvis transferred to the NASDAQ Smallcap Market after its stock failed to meet NASDAQ's $1 per share minimum bid price requirement for continued listing on the National Market. In desperate pursuit of revenue, the company formed a subsidiary, Corvis Government Services Inc., to market its services and equipment to the federal government, the only bright spot for information technology amidst the telecom crash. In 2003, Corvis announced several more rounds of lay offs at both its Algety Telecom division in France and its corporate headquarters in Columbia.
Corvis's Desperate Gamble
With few business prospects, Corvis decided to gamble on a major acquisition. In February 2003, the company arranged through C III Communications LLC, a Delaware limited liability company, to acquire Broadwing Communications Services Inc., the fiber-optic network of Broadwing Inc. Corvis owned 96 percent of C III, which it incorporated specifically to acquire Broadwing Communications, which had been formed in 1999 after Broadwing Inc. purchased IXC Communications for $3.2 billion. Corvis concluded the acquisition in June 2003 for $81 million. Although Corvis owned most of C III, the venture was set up with minority stake holder Cequell III, a St. Louis investment and management firm. Under the terms of the arrangement, Corvis held a 96 percent stake in the acquisition, with Cequel III and former parent company Broadwing Inc. retaining a 1 percent and 3 percent interest respectively. The Austin-based fiber-optic subsidiary with the nation's most advanced communications network built with Corvis's own equipment was once the crown jewel of Broadwing Inc. (later Cincinnati Bell). Under pressure from mounting debt, Broadwing was forced to shed its prized asset built for $4 billion at a fire-sale price. With Broadwing Communications, Corvis acquired an 18,700-mile network that stretched from Seattle to Boston with 150,000 long-distance customers, most of them corporate. Broadwing Communications was also debt free and on track to break even by mid-year 2003.
Nevertheless, Corvis's revenue plunged another 83 percent in the first quarter of 2003, leading it to lay off another 150 employees, almost one-third of its staff. The latest round of lay offs brought Corvis's staff to 350, down from 1,625 employees in 2001. The company took another hit when two different juries found that Corvis violated two patents of its rival Ciena Corporation. Investors also criticized Corvis for buying Broadwing when it was struggling to survive. In September 2003, Corvis initiated a ninth round of layoffs in three years, cutting 200 more jobs and eliminating most of the fiber-optic company's original workforce. In addition, Corvis lost out to Ciena on a lucrative $150 million contract to help expand the federal government's telecommunications networks. With virtually no business and few employees left on the equipment side, Corvis transformed itself from vendor to communications services carrier. However, if Corvis viewed Broadwing as the engine to a more profitable market, the wholesale carrier business looked similarly grim. Although Broadwing retained its customers, it was experiencing reduced traffic and declining sales. With vanishing revenues on all sides, the company seemed to be fast approaching its demise.
Reorganization and Survival
Nevertheless, with the economy on the mend, Corvis began 2004 with brighter prospects. By the end of January, its shares had climbed more than 65 percent from April 2003, when they bottomed out at 48 cents, making it one of the best performers on the major stock exchanges. The company had not said or done anything to cause the rapid rise of its shares, but Corvis became the subject of investment hype as money began returning to the market and its shares rose above one dollar, allowing Corvis's stock to begin trading again on the NASDAQ national market. At the same time, the Broadwing acquisition was beginning to pay off, producing 99 percent of the company's revenue. For the fourth quarter of 2003, Broadwing generated revenue of $142.5 million while the equipment side of the business brought in just $2.1 million. In March 2004, Corvis took another step away from its roots as a maker of fiber-optic gear by purchasing Focal Communications Corp., a provider of local phone service in twenty-three cities. The purchase was made for $97.7 in acquisition costs and $98.1 million in assumed debt. By combining Broadwing's long-distance network with Focal's local network, Corvis was anticipated to generate revenue approaching $1 billion. The acquisition also was symptomatic of the ongoing turmoil and consolidation in the telecommunications market.
In September 2004, Corvis announced it was changing its name to Broadwing Corporation effective October 8, 2004, reflecting the company's principle focus as a provider of voice, data, and media network services to companies, carriers, as well as federal government agencies. The reorganization under the Broadwing name stemmed from the brand name's visibility and recognition in the marketplace. With the name change, Broadwing Corporation became the holding company for Broadwing Communications, its service provider. In addition, Broadwing Corporation continued to operate its optical communications equipment business under the Corvis name, and founder David Huber remained chairman and chief executive of the renamed firm. The company also initiated a one-for-twenty reverse stock split in which every twenty shares would be the equivalent of one share of stock. Following the stock split, the company offered a one-for-one stock dividend that allowed shareholders to receive one share of stock for each share they owned. As 2004 came to a close, the company had survived the worst of the telecom downturn with a new focus, revenues, rising shares, and a promise of more profitable times ahead in the highly competitive telecommunications market.
Principal Divisions: Broadwing Communications, LLC; Corvis Equipment Corporation.
Principal Competitors: AT&T; Sprint FON.
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