Ciena-Tellabs deal comes apart Linthicum company's falling stock does in nearly $4 billion sale

'Let's not prolong agony'

Maryland firm's CEO says, 'We're strong, we're not damaged'


September 15, 1998|By Shanon D. Murray | Shanon D. Murray,SUN STAFF

Ciena Corp. and Tellabs Inc. called off their plans to merge yesterday, conceding the improbability that shareholders would approve the nearly $4 billion deal.

Michael J. Birck, president and chief executive of Tellabs, said the acquisition was called off in light of Ciena's worsening financial outlook.

"We looked at the revised Ciena prospects and factored in the sentiment in the market. We said this would probably not go, so let's not prolong the agony," Birck said in a conference call with analysts.

Shareholders were scheduled to vote on a renegotiated deal in mid-November, but investors expressed serious doubts about the merger after shares of Ciena plunged to below $16 last week, analysts said.

Yesterday, shares for both telecommunications companies tumbled. Ciena fell $2.75 and closed at $13.8125. Its stock has fallen 84 percent since its all-time closing high of $88.625 on July 20, a month after the merger was announced.

Tellabs shares closed at $37.6875, down $7.3125. Shares initially surged on the news that the Ciena deal was dead, but plunged later after Tellabs said third-quarter earnings and sales would fall short of estimates.

Patrick H. Nettles, Ciena's president and chief executive officer, said he is intent on proving the survival skills of his company, despite the aborted deal.

"Remember, Tellabs came to us, not the other way around. We're very happy being independent," Nettles said. "We don't feel that a partnership was a need; it was an opportunity.

"We're strong. We're not damaged."

The Linthicum-based telecommunications equipment firm makes devices that enable fiber-optic lines to carry more data. Tellabs, based in Lisle, Ill., sells switching equipment to route large amounts of data.

Because both companies agreed to end the deal and parted amicably, they said, neither company will owe the other a breakup fee. Under the terms of the purchase, Tellabs was to pay Ciena $100 million if it backed out, and Ciena was to pay $200 million if it chose to walk away from the deal.

Analysts were not surprised that the deal fell apart.

"Investors were pretty much on top of the situation," said Patrick Houghton, an analyst with Wheat First Union in Richmond, Va. "They smelled the problems and they wanted out."

Tom Burnett, director of Merger Insight, a New York-based investment research firm, said Ciena had "disappointments that no one counted on. But it is still a wonderful company and it will still do very well."

While he fully expects another suitor to approach Ciena, it may not happen for a while, he said.

"Ciena has to get its numbers up," Burnett said. "It has to sell some equipment."

Ciena also released its third-quarter earnings yesterday, which were in line with the company's previously forecasts.

Earnings for the quarter that ended Aug. 1 decreased 55 percent to $16.1 million, or 15 cents per share, from $35.7 million, or 34 cents a share, a year earlier.

"I think it was pretty evident from the earnings that this company isn't what Tellabs thought it was buying. It was wise of the Tellabs management to get out of this while they could," said Michael Margolies, president of Avalon Research Group Inc. in Boca Raton, Fla.

Shareholders were to vote on the merger in mid-November, after two postponements.

The vote was initially set for Aug. 21, but was hastily postponed when Ciena revealed that it had received news that day from AT&T Corp. that the phone giant would not be buying any of its products. That day, Ciena's share price fell 45 percent, to $31.25.

The vote was reset for Sept. 9, then pushed back into November after Ciena and Tellabs renegotiated the terms of the merger -- from a one-for-one stock swap to 0.8 Tellabs share for each Ciena share.

The original deal, announced June 3, was valued at $7.1 billion, but was reduced by 44.5 percent to $3.94 billion. But Ciena's share price continued to decline. Then, on Wednesday Ciena shares fell more than 30 percent on news that it lost a major equipment contract worth $100 million.

In an effort to jump-start a turnaround, yesterday Ciena introduced a new optical networking product that it said would allow phone companies to transmit more data at a faster rate. The product is expected to be available in early 1999, Ciena said.

Pub Date: 9/15/98

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