Ciena prospects for merger seen suddenly slim Firm must take less from Tellabs or find new offer, analysts say

AT&T decision casts doubt


August 22, 1998|By William Patalon III | William Patalon III,SUN STAFF Staff writer Mark Ribbing contributed to this article.

Ciena Corp., finally feeling the pinch of strident competition in a market niche it essentially pioneered, will likely have to take less than planned from suitor Tellabs Inc., or find another merger partner altogether, industry and securities analysts said yesterday.

With nearly all its business coming in one product niche and from two customers -- Sprint Corp. and WorldCom Inc. -- and with intensifying competition from telecommunications-equipment behemoth Lucent Technologies Inc., analysts say Ciena could find it virtually impossible to continue to go it alone.

"Ciena is at risk when it is so focused and concentrated on a single product line and a small set of customers," said Michael J. Balhoff, a telecommunications analyst and managing director for Legg Mason Wood Walker Inc. in Baltimore. "Diversification is helpful, research and development costs [for new products] are high, and scale is important -- having a large base. Also important is not being tied to one set of products or customers."

Said Hambrecht & Quist analyst Joe Noel: "The prospects for Ciena are greatly reduced here."

Yesterday, the Linthicum-based Ciena disclosed that AT&T Corp., the world's largest long-distance carrier, had opted not to buy its equipment, a revelation that cast doubt on Tellabs' agreement to purchase the local technology company for $6.86 billion.

At the very least, analysts say, Ciena stockholders may have to accept less than was originally proposed if they still want the deal to go through. Worse, still, is the possibility that Ciena may be getting elbowed aside in a business where it was first to market.

"One of the biggest carriers not buying your products? -- yeah, that's pretty scary," said Lisa Pierce, a director for the Cambridge, Mass.-based Giga Information Group.

A shareholder vote on the deal set for yesterday was delayed until September. Ciena shares responded by dropping about 45 percent to close at $31.25 yesterday, erasing about $2.59 billion in shareholder value in a single day's trading.

With yesterday's revelation and an earlier announcement that earnings would slow, the company's shares are down about 66 percent from their July 21 high of $92.375.

Ciena, which makes electronic gear that boosts the amount of voice and data traffic that can be pushed through a fiber-optic telecommunications pipeline, was one of the first to market with such a product. Thanks to that early technological lead, its stock price soared, making its founders rich and even drawing entreaties from a suitor, Tellabs, recognized as one of the best-managed telecommunications-equipment companies in the business.

But Ciena's technological advances also drew competition, said Paul Zagaeski, analyst with Giga. Now big companies such as Lucent -- which has $23.4 billion in annual sales, compared with Ciena's $374 million, plus a broader product line that makes it a virtual one-stop shop for carriers such as AT&T -- have entered the fray and Ciena suddenly finds itself under the gun.

Ciena's technology is technically referred to as "dense wavelength division multiplexing," or "DWDM," essentially a high-tech prism that separates fiber-optic traffic into different colors, or pieces, boosting the cable's capacity. Capacity is important for companies such as AT&T as Internet traffic continues to grow and as companies look to merge text, images and sound into new telecommunications devices.

DWDM technology is still new enough that an industry "standard" has not evolved, meaning each of the players in the business has its own proprietary way of making the technology work, said Giga Information's Pierce. Until that standard evolves, the companies must battle it out, campaigning their individual technologies.

This battle is not unlike the one that occurred between the "Beta" and "VHS" offerings in videocassette recording in the 1980s. Many believed the Beta version was technically better, but most companies rallied around the VHS version and today that's the one that is the market standard.

Lucent's DWDM technology may be just different enough from Ciena's to set it apart. And Pierce thinks that AT&T wanted to go with an established player such as Lucent, a company it believed would be around for the long haul. (As several analysts pointed out, it probably doesn't hurt that Lucent is the old Bell Telephone equipment subsidiary that AT&T spun off from its long-distance business not too long ago; the two are separate companies, but many ties doubtless remain, these analysts say).

So what happens to Ciena? Analysts speculated that Tellabs might still buy it, albeit at a much lower price. Instead of the agreed-upon one-share-for-one-share stock swap, " 'The Street' is saying 0.6 or 0.7 to one might be a better ratio," said Michael S. Davies, analyst with Punk, Ziegal & Co. in New York City.

Davies said the deal "strategically makes perfect sense. Strategically, Tellabs needs this next competency to shore up their growth potential. Ciena needs to expand its customer base. It needs the distribution and infrastructure Tellabs has in place."

If Tellabs drops out, several analysts said, it's possible that Cisco Systems Inc., the acknowledged leader in the networking business, might step up and buy Ciena. And still others say it's very possible that Ciena is entrepreneurial and nimble enough to slug it out on its own by pursuing business from the other Bell companies, or the tiny new companies sprouting up to compete with the Bells.

Pub Date: 8/22/98

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