Ciena deal in jeopardy after stock plunges 45% Merger votes delayed as AT&T rejects firm

August 22, 1998|By Mark Ribbing | Mark Ribbing,SUN STAFF

Shares of Ciena Corp. plunged 45 percent yesterday after AT&T Corp. scratched any chance that it would buy the Linthicum telecommunications equipment maker's products, throwing its purchase by Tellabs Inc. -- initially valued at about $7 billion -- into limbo.

Shareholders were gathered at an Inner Harbor hotel to vote on the Tellabs deal when company executives arrived to deliver the news.

Ciena and Tellabs postponed their shareholder meetings until Sept. 9, and analysts said the deal would have to be restructured if it's to be salvaged.

"I don't think it goes through as previously written," said Joe Noel, an analyst with Hambrecht & Quist LLC in San Francisco. "If it's going to go through on the regular terms, why not just do it today? Why adjourn the meeting?"

Under the original deal, the merger of the two companies was structured as a 1-for-1 stock swap, with each Ciena share having the same value as each Tellabs share. Yesterday's trading created a huge gulf between the two companies' stock prices. Ciena, yesterday's second-most-active U.S. stock, closed at $31.25, down $25.5313. Tellabs, the fourth-most-active stock, finished at $62.4375, up $5.1875.

If the deal is approved in its present form, Tellabs shareholders would be exchanging their stock for shares that are worth half as much.

"Certainly Tellabs is going to have to renegotiate the deal," said Michael S. Davies, an analyst with Punk, Ziegel & Co. in New York. "It would be really degrading to their stock if it went on under the same structure.

"There's a chance it [the acquisition] could fall apart," he said.

"My opinion is that the deal is at serious risk, and that's probably an understatement," said Andy Schopick of Nutmeg Securities Ltd. in Westport, Conn. "I think it would be very difficult for Tellabs' shareholders to vote favorably for this merger under the original conditions."

'Reactive mode'

Tellabs had little comment about the announcement. "We're at the point where we're trying to analyze this development," said Tom Scottino, Tellabs' director of investor relations. "We're still in kind of a reactive mode."

In a statement released several hours after the announcement, Ciena President and Chief Executive Officer Patrick Nettles said, "The timing of this morning's phone call from AT&T was troubling and surprising in light of the imminent Ciena and Tellabs shareholder meetings, and the news is of course disappointing."

Ciena reported yesterday that its board continues to recommend shareholders approve the acquisition.

Ciena makes devices that allow phone lines to handle more phone calls, Internet messages and other communications. AT&T, the largest telephone company in the country, had been testing Ciena's gear for its networks.

Winning the AT&T account was a high priority for Ciena, which has been trying to broaden its razor-thin customer base: In fiscal 1997, 97 percent of Ciena's revenue came from two customers -- Sprint Corp. and WorldCom Inc.

Since the Tellabs-Ciena deal was announced amid great fanfare June 3, the normally high-flying Ciena has run into turbulence. Last month, AT&T dealt Ciena a blow when it decided to stop testing a Ciena product that turns one communications channel into 16. Ciena hoped AT&T would consider buying higher-powered equipment that could turn one channel into 40. Yesterday, those hopes were dashed.

AT&T spokesman Dave Johnson said the company would not comment.

Yesterday's stock plunge was the second in a week for Ciena. On Aug. 14, Ciena shares tumbled 24 percent after the company said price concessions and a $25 million order delay would depress fiscal third-quarter earnings.

Ciena did not identify the company that received the price concessions, but it is widely believed to be Sprint. The company that delayed the $25 million order was also unidentified, but WorldCom has a history of delaying its Ciena orders.

'Value diminished'

These setbacks, followed by the AT&T decision, have left many analysts wondering about Ciena's future. "The problem now with Ciena is, who are they going to sell to?" asked Noel.

Added Schopick, "Clearly, the value of Ciena has been greatly diminished by recent events."

Ciena shares were trading well over $80 per share as recently as late last month. Yesterday's closing price was lower than the $37 per share Ciena commanded at the end of its initial public offering Feb. 7, 1997.

Ciena spokesman Denny Bilter said the company has no plans to lay off any of its 1,000 employees. "We're still in a growth mode," he said.

AT&T is using equipment made by a Ciena rival, Lucent Technologies Inc. Lucent had been part of AT&T before spinning off to form the telecommunications equipment company in 1996. "The AT&T people are still very close with the Lucent people," Noel said.

Shareholders' mood

At the shareholder meeting downtown, the mood before the announcement was upbeat as shareholders seemed to overwhelmingly favor the acquisition. "If it makes for more stability, that's a good thing," said Bruce Lancaster of West Friendship, a 47-year-old captain in the Howard County Fire and Rescue Department.

Nettles entered the small, ornate conference room with a grim expression. Reporters were not allowed in the room for his address to shareholders. An attorney with Nettles prevented a photographer from taking a picture of the Ciena chief.

After the abbreviated meeting, the shareholders flowed into the lobby.

"So much for that," said shareholder Virginia Whittlesey, 76, of Baltimore. "If the Ciena stuff isn't being tested anymore, that's kind of a major setback, I would presume. We'll see what happens."

Pub Date: 8/22/98

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