Tellabs is buying Ciena for $4 billion Price drops $3.1 billion after AT&T statement

August 29, 1998|By Shanon D. Murray | Shanon D. Murray,SUN STAFF

Tellabs Inc. and Ciena Corp. said yesterday they will move forward with their merger, but Tellabs will pay about $4 billion for the maker of telecommunications equipment -- not the $7.1 billion the companies had agreed to in June.

The drop in price reflected the loss in value of Ciena's shares after AT&T Corp. announced Aug. 22 it was no longer interested in buying the Linthicum company's technology. Under the renegotiated deal each 0.8 share of Tellabs stock will be exchanged for a Ciena share.

The original deal, announced June 3, called for a one-for-one swap of shares.

Shareholders were expected to vote on the merger Sept. 9, but both companies said that date may be pushed back another week or so. The boards of directors of both companies have approved the new deal and unanimously recommend its approval by their respective stockholders.

"From atechnical, marketplace and competitive perspective, this was the right thing to do," said Michael Birck, Tellabs' chief executive, in a conference call with financial analysts yesterday.

"We continue to be impressed with Ciena's people and the market opportunities as we look to combine some of our products with technology in development at Ciena," he said.

Patrick Nettles, Ciena's chief executive, said there was "no ill will" over the renegotiated terms. "Both companies recognized the impact of [the AT&T announcement] and we had to deal with it," he said.

AT&T told Nettles it was no longer interested in buying Ciena's products an hour before Ciena and Tellabs shareholders were set to vote on the merger last week.

Tellabs' shares fell sharply yesterday, closing at $49, down $8.8125. Ciena closed at $35.3125, up $4.50. On Aug. 22, the day of the AT&T announcement, Ciena's stock plummeted 45 percent to $31.25.

The new deal values Ciena at $39.20 a share, based on Tellabs' closing price yesterday. The June deal had valued Ciena at $65.88 a share.

Analysts said investors most likely believe Tellabs, which is based in Lisle, Ill., is paying too much for Ciena, the telecommunications equipment maker.

"If people think Tellabs is overpaying, they are mistaken," said Eric C. Buck, an analyst with Donaldson Lufkin & Jenrette in New York. "Nothing has happened to impair the value of Ciena."

Tellabs' CEO Birck said, "Price is an issue. My guess is that's tTC going to be an ongoing thing."

The purchase is expected to cut Tellabs earnings by 5 to 6 cents a share in the third quarter and as much as 7 cents in the fourth quarter, Birck said. Earnings for 1999 could also be reduced as much as 15 cents, he said.

Paul Silverstein, an analyst with BancAmerica Robertson Stephens Inc. in New York, played down the importance of the new earnings outlook.

"Dilution is a price Tellabs has to pay to own a company that enables it to address the 21st century," he said in a ringing endorsement of Ciena's technology.

Ciena makes devices that enable fiber optic lines to carry more data, and Tellabs sells switching equipment to route large amounts of data.

While the original value of the deal has been eroded, Nettles said he does not expect another suitor to try to outbid Tellabs. "The option is unlikely because of the way the deal is structured," he said.

According to a filing with the Securities and Exchange Commission, the new agreement calls for Ciena to pay Tellabs a $200 million penalty if it walks away from the sale, while Tellabs would pay Ciena $100 million if its backs out.

It's no surprise the deal rebounded despite AT&T's announcement, Nettles said.

"AT&T did an incredible amount of damage in terms of market perception, but not in our business prospects," Ciena's CEO said. "Our working relationships are still good."

Regarding speculation that Ciena may sue AT&T, Nettles said it would be "strange" to sue.

Nettles also would not comment on the two lawsuits filed this week against Ciena in U.S. District Court on behalf of investors who bought the company's 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.

Regarding the future, Nettles said he's expecting the merged companies will have a "strong presence in Maryland."

Pub Date: 8/29/98

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