Ciena ponders next move after loss of merger deal As high-tech pioneer, Linthicum firm seeks new course to future

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

Tellabs Inc.'s purchase of Ciena Corp. was called off for good yesterday, raising urgent and difficult questions about what the future holds for the Linthicum company.

Fearing vigorous opposition from shareholders, the companies announced yesterday that they were abandoning the deal, which was originally valued at about $7 billion but was later renegotiated to about $4 billion after disappointing earnings estimates and a lost contract sent Ciena's stock into a tailspin.

On June 3, when the proposed merger was announced, Ciena stock closed at $61.75 a share. Since then, it has lost 79 percent of its value, closing yesterday at $13.1875.

This is an enormous loss by any standard and a particularly humiliating decline for a company that until recently was viewed as one of the most successful start-up firms in American history.

Ciena's claim to fame is that its equipment allows one fiber-optic line to handle many more communications channels. For example, a normal fiber-optic line can handle about 32,000 phone calls at a time. But with Ciena equipment the same line can handle nearly 1.3 million calls.

Now with the Tellabs deal in ruins and hungry competitors barking at its door, Ciena must determine its next step.

The company could attempt to go it alone, trying its luck in a telecommunications equipment marketplace increasingly dominated by much larger companies.

Or, Ciena could seek another partnership with a larger firm. However, it may not be easy for Ciena to command a good price while its stock remains depressed.

While it ponders this choice, Ciena has to convince investors, rivals and potential customers that it remains a strong player in a fiercely combative, constantly changing industry.

Strengthening stock

"The focus of the next 12 months will be rebuilding shareholder value," said Patrick H. Nettles, Ciena's president and chief executive officer.

"We're pretty happy going on our own. We've got a lot to work with," Nettles said. "We have a market that is growing at a phenomenal rate. We've got a strong employee base and a strong financial sheet."

Analysts said the company has a tough fight ahead of it because of its small size and lack of deep pockets.

"Most importantly, Ciena must assure its customers that it is going to be around for the long term," said Patrick Houghton, an analyst with Wheat First Union in Richmond, Va.

That may be an uphill battle, since customers have come to expect that Ciena would be able to draw upon the strength and size of Tellabs, a Lisle, Ill., company that makes equipment for managing communications on phone networks.

"At trade shows, if you wanted to buy a solution, it was pretty clear it was going to be a Ciena-Tellabs solution," said Gurinder Parhar of HSBC Securities in Toronto. "I'm sure customers had expected this deal would get done.

"I think [Ciena] will still be a profitable business for a couple of years. But does the best leverage come on their own or with a partnership?"

Rich rivals

One hazard of going it alone is the emergence of serious competition from deep-pocketed rivals. Ciena was a pioneer in its industry, but global telecommunications equipment titans like Lucent Technologies Inc. and Italy's Pirelli SpA have begun to poach on its space.

These large, highly diversified companies have an important advantage over Ciena: They can offer lower prices to customers and subsidize the cuts with funds from other parts of their businesses.

This new reality presents a stiff challenge for Ciena executives.

"They basically need to build their own business as if they're going to be a stand-alone business forever," said Michael Neiberg of ING Baring Furman Selz LLC in New York. "Ciena is going to kind of have to reinvent their company because of the reality that they will be competing with bigger companies from now on."

There is the possibility, though, that Ciena will try to join forces with someone else to compete with the big boys.

Cisco a rumored partner

The most commonly mentioned potential suitor is Cisco Systems Inc., the acquisitive San Jose, Calif., firm that has become a top supplier of the routers and switches for Internet traffic.

Ciena and Cisco announced an agreement April 20 to link their network equipment. Some saw the move as a prelude to Cisco's purchase of Ciena.

Ascend Communications Inc., an Alameda, Calif. telecommunications equipment firm, has recently been identified as another possible buyer of Ciena.

Other rumored suitors include European telecommunications equipment giants Alcatel Alsthom SA, Siemens and Ericsson.

"I wouldn't be surprised to get a phone call [from a suitor]," said Nettles who added that he probably wouldn't be interested in selling the company while its stock is so depressed.

Several analysts said that Ciena, despite its recent troubles, remains an attractive partner.

"The technology they have is worth a lot to a potential buyer," said Neiberg, the ING Baring analyst.

"Ciena has good technology, but it could use a partner," said Wheat First's Houghton.

Nettles said that while Ciena claws its way back, it will not let go of workers. Ciena currently employs just over 1,000 people. "We don't anticipate there will be any job losses," he said.

Pub Date: 9/15/98

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