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Boston Capital

Internet-era boom icon’s quiet bust

I have a hard time explaining how a few really crazy things actually happened in the past. The best I can do: You had to be there at the time.

That’s rarely a good answer, and it doesn’t come close to explaining some of the things that occurred near the end of the Internet-era stock boom. One of those things was Sycamore Networks Inc.

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Sycamore, a telecommunications company in Chelmsford, made headlines this week when executives finally gave up and put together a plan to liquidate the business.

As a company, Sycamore has existed a mere 14 years. The quiet, orderly ending is the polar opposite of noisy events that created a local business phenomenon. It’s a story of fortunes made and fortunes lost. Mostly lost.

Sycamore was formed in 1998 by two men who had become stars just a few years earlier, Desh Deshpande and Dan Smith. Their new company was going to make sophisticated hardware for fiber-optic communications networks — the information highway for a communications revolution.

Just a year earlier, Deshpande and Smith sold another company in the same business for a whopping $3.6 billion. They didn’t just make a fortune for shareholders — and themselves — by building and selling Cascade Communications. They were relative small fry competing against the technology giants of the day — the likes of Nortel Networks Inc. and Lucent Technologies Inc. And they won.

Sycamore went public in 1999. The company had just one customer and $11 million in sales at the time. No matter: Investors lined up for the chance to buy the stock at practically any price. They all wanted to put their money on Desh and Dan.

Sycamore’s initial public offering priced shares aggressively at $38 each. The stock ended its first day of trading at $184.75, giving the company a market value of $14 billion.

Instantly, Sycamore was the fourth most valuable stock in Massachusetts, worth much more than big, established companies like Raytheon Co., Staples Inc., and TJX Cos.

But the IPO was not the craziest part of this story. Sycamore went back to the market five months later and sold shares for nearly 12 times the original IPO value. Desh and Dan — who had made about $150 million each in the Cascade sale — were worth more than $17 billion on paper in early 2000.

Sycamore was so hot because investors believed a pack of new competitors would challenge conventional phone companies by building vast new fiber-optic networks and they would need lots of hardware. One big early Sycamore customer: Enron Corp.

But the collapse of the Internet bubble killed most of those would-be competitors. And firms that counted on supplying them with gear succumbed soon after.

“There were so many of these companies, and suddenly they were all going after just a few accounts,” says Craig Matsumoto, managing editor of Light Reading, a website following the telecom networking industry. “They were built on the assumption there would be dozens of these [new network] companies to sell to, and in the US, there turned out to be only a handful.”

Sycamore never recovered, but it didn’t die either. The company continued to sell products to existing customers, limping along and only losing relatively small amounts of money.

Sycamore faced a conundrum: what to do with all the cash it raised by selling stock. Oddly, it chose to sit on the money. For years.

Sycamore shares — once red-hot bets — eventually traded for about the value of the company’s cash.

Some stockholders grumbled, but Sycamore’s founders owned nearly a third of the company. They still do.

Sycamore became a zombie company. It tried to develop a new software business but never appeared to generate any real sales.

Finally, Sycamore issued a big dividend in 2009. And another the next year. It issued a third this fall — whittling down the pile of cash from more than $600 million to less than $200 million. Now shareholders will get whatever is left once the company is wound down.

Sycamore’s stock market value Thursday: $165 million.

There is nothing unusual about a struggling company finally giving up. The crazy part was all the money that smart people threw at Sycamore Networks early on. It doesn’t make sense today. It really didn’t make sense then, either.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.
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