Ciena stock tumbles again, and Tellabs remains silent Analysts say deal is being reworked

August 28, 1998|By Shanon D. Murray | Shanon D. Murray,SUN STAFF

It's been a bad week for Ciena Corp., but the good news for the Linthicum-based company may be that there has been no news from its potential partner.

Ever since its shareholder vote to approve its merger with Tellabs Inc. was postponed last Friday, its stock has continued to decline, and it has been named in two shareholder lawsuits filed yesterday and Wednesday that claim Ciena misled investors.

Tellabs' board of directors met Tuesday, but the company has declined to comment. Analysts say the silence means that there is some fast and furious negotiating going on between Tellabs and Ciena as they try to mend the deal.

Shareholder votes have been reset for Sept. 9.

"If Tellabs decided to kill the deal altogether, then its board would have already announced that," said Timothy Savageaux, an analyst with Volpe Brown Whelan & Co. in San Francisco.

"What is happening now is the two sides are trying to hammer out a lower exchange ratio," he said. "The longer the stretch without saying anything, the thornier the issues are. But the companies must realize the longer they go, the more the spread will widen to."

What was originally a $7.1 billion deal has eroded to about $5.91 billion in value amid a sharp fall in the price of Ciena shares.

Ciena closed yesterday at $30.8125, down $3.4375, or 10 percent. Tellabs shares fell 68.75 cents to $57.8125 yesterday.

On July 20, Ciena had closed at an all-time high of $88.625. Last Friday, the stock plummeted 45 percent to $31.25 on news that AT&T Corp. was no longer considering buying Ciena equipment.

Ciena has desirable technology that would lend it some power at the bargaining table, said James E. Jungjohann, an analyst with CIBC Oppenheimer Corp. in New York.

The company makes electronic gear that boosts the amount of voice and data traffic that can be pushed through a fiber-optic telecommunications pipeline. The technology is technically referred to as "dense wavelength division multiplexing," or "DWDM."

On the other hand, the company has had a spate of bad news, and if these factors are causing Tellabs to refigure a potential deal, it would certainly scare off a lesser suitor, Savageaux said.

"We know there's another company in the wings that is interested in Ciena, but Tellabs is probably capable of paying as much as anybody else," he said.

Cisco Systems Inc. has been mentioned by analysts as the most likely suitor. The San Jose, Calif.-based company is the acknowledged leader in the networking business. Cisco is HTC pushing into the phone equipment market and it said in April that it would make its equipment compatible with Ciena's. Some saw the move as a prelude to buying Ciena.

Yet, Tellabs became the primary suitor. But the price of the deal always has been an issue for the two companies.

During initial negotiations, Tellabs wanted to swap 0.88 of a share for each Ciena share. Ciena wanted at least 1.1 Tellabs share for each share.

The two sides settled on a 1-for-1 swap, but it appears that is now in jeopardy. At current market prices, a Ciena share is worth about 0.52 of a Tellabs share.

If Tellabs agreed to more than that -- especially at the 0.80 or 0.75 many analysts are expecting -- it would be overpaying, Savageaux said.

However, Ciena is worth it, said Jungjohann. "My guess is anything below 0.70 wouldn't fully reflect Ciena's value," he said. "I still like Ciena's long-term story.

"Tellabs already showed its hand. It indicated to Wall Street it needed Ciena, and I'm betting it's going to do whatever it takes to close the deal."

In the meantime, two lawsuits have been filed against Ciena in U.S. District Court this week on behalf of investors who bought Ciena shares from May 21 to Aug. 21.

The suits, which seek class-action status, claim that the company didn't disclose information about its financial health and products.

The shareholders are being represented by the firms of Milberg Weiss Bershad Hynes & Lerach LLP in New York and Schiffrin Craig & Barroway LLP in Pennsylvania.

"The allegations are without merit," said Denny Bilter, a Ciena spokesman.

Ciena said it intends to defend the suits vigorously, and analysts were quick to dismiss them as "expected nuisances," said Savageaux, of Volpe Brown Whelan & Co.

But Greg Mesniaeff, an analyst with Robinson-Humphrey in Atlanta, noted that the suits are another negative for Ciena.

"These are standard cookie-cutter complaints that are filed routinely," he said.

"But they saddle Ciena with more liabilities, which don't make it look any better in the eyes of Tellabs shareholders."

Pub Date: 8/28/98

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