Anatomy of a deal doomed to die Ciena's setbacks, and plunging shares, end Tellabs' pursuit

September 15, 1998|By Mark Ribbing | Mark Ribbing,SUN STAFF

The collapse of the planned acquisition of Ciena Corp. comes at the end of a summer in which little went right for the Linthicum-based telecommunications equipment company.

At the start of the season, things looked sunny for Ciena. On June 3, the company announced that it would be bought by a highly successful Illinois firm, Tellabs Inc., in a stock swap initially valued at about $7 billion. Ciena's stock rose strongly in the weeks following the announcement, hitting an all-time closing high of $88.625 on July 20.

Then Ciena got caught in a hurricane of bad news, a seemingly endless series of setbacks that sent Ciena stock plunging and, analysts said, ruined the Ciena-Tellabs acquisition. Gurinder Parhar of HSBC Securities in Toronto said "investor reaction to news since the announcement of the deal" was the most important factor in the demise of the deal.

"Every piece of information was just a little more negative than the previous piece of information," said Michael Neiberg of ING Baring Furman Selz LLC in New York.

"It's just apparent that whatever could go wrong for them has."

The storms began swirling on July 30, when Ciena's stock fell as low as $74.75 on news that AT&T Corp. would not buy certain categories of Ciena's dense wavelength division multiplexing (DWDM) equipment, which expands the capacity of phone networks by turning one communications channel into several. Ciena still hoped that the long-distance giant would buy some of its other products.

On Friday, Aug. 14, Ciena released a disappointing earnings estimate, saying that one of its customers had delayed a $25 million order and another had forced it to make price concessions. The markets reacted angrily to the news, sending Ciena shares down 24 percent to close at $54.125. Such a dramatic fall by the stock raised questions about the health of the Ciena-Tellabs deal. The companies had agreed to swap their stock on a one-for-one basis. If Ciena's stock became significantly less valuable than Tellabs stock, then Tellabs' shareholders -- who would have veto power over the acquisition -- stood to get the short end of the deal.

However, even after Ciena's sour earnings prediction, analysts believed that the acquisition would still go through.

The rise before the fall

Shareholders had confidence in Tellabs' management, and Tellabs' management had confidence in Ciena. Ciena shares rose strongly when trading resumed the following Monday, closing at $56.125.

However, this lull in Ciena's problems proved to be nothing more than the eye of a very large storm.

As shareholders gathered on Aug. 21 to vote on the acquisition, Ciena revealed that AT&T would not be buying any of its products, a setback large enough to cause Ciena and Tellabs to postpone the vote.

On that day alone, Ciena's stock lost a stunning 45 percent of its value, closing at $31.25. As Ciena's fall gained momentum, the ++ company became the target of lawsuits claiming that it misled investors as to its financial health.

Then, on Aug. 28, Ciena and Tellabs announced that the terms of the acquisition had been renegotiated. Under the new terms, a Ciena share would be worth only 0.8 of a Tellabs share. The renegotiation reduced the value of the stock swap to about $4 billion -- almost $3 billion less than the original offer.

On the evening of Sept. 1, the companies put off the shareholder votes again, from Sept. 9 to mid-November.

The delay fanned market concerns that the deal would not go through, and the next day Ciena shares fell another 15 percent, closing at $28.4608.

On Sept. 9, the stock fell another 30 percent on news that one of Ciena's customers, Digital Teleport Inc., had chosen Pirelli SpA over Ciena for a $100 million equipment contract.

Pirelli, a large Italian tire and cable maker, had not had much success breaking into the American DWDM market. Now, like Ciena arch-rival Lucent Technologies Inc., Pirelli seemed able to draw on its huge corporate resources to compete in an area that Ciena once dominated.

'A nail in the coffin'

Parhar said Ciena's loss to Pirelli was "a nail in the coffin" for the Ciena-Tellabs deal.

"Tellabs felt Ciena wasn't keeping up from a technology perspective," said Parhar. "The perception was that [Ciena] was losing its technological edge."

Ciena's stock value now sat at $19.75. When the company had gone public on Feb. 7, 1997, it had opened trading at $23, only to rise to $37 by the closing bell. That public offering set a record for the highest first-day valuation ever recorded for a venture-backed start-up. Now, though, the investment frenzy that had propelled Ciena into the record books was working the other way.

Every bit of bad news was sending Ciena stock into a new round of free-fall.

When asked if the markets overreacted to Ciena's problems, Neiberg replied: "In the same way that they overreacted to the positive side."

"It seemed to be an ongoing pattern," said Tellabs President and Chief Executive Officer Michael J. Birck of the torrent of bad news from Ciena.

"We just looked at the cost of doing the deal as it was structured, and we decided we were reaching a point where it was punitive."

Ciena President and Chief Executive Officer Patrick H. Nettles, said, "There was an indication that, in [Birck's] view, it would take a substantial reduction in the ratio from 0.8 to something much lower to get a successful shareholder vote."

Ciena was not eager for yet another significant reduction of the purchase price, so the two companies agreed to go their separate ways.

Yesterday's announcement didn't help Ciena's stock.

The shares fell $2.75, closing at $13.1875 -- a decline of 17 percent.

Pub Date: 9/15/98

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