Ciena to buy Calif. firm

Addition to extend company's reach into city network markets

`It's a powerful team'

$1.2 billion purchase seen as signal of consolidation ahead

February 19, 2002|By Stacey Hirsh | Stacey Hirsh,SUN STAFF

Ciena Corp., the Linthicum maker of fiber-optic equipment, said yesterday that it would buy a major California-based telecommunications equipment company - the biggest it has ever acquired - in a deal valued at $1.2 billion.

Ciena, whose red-hot growth was doused by the sharp downturn in the telecommunications industry, is counting on its purchase of ONI Systems Corp. to expand its business and help it regain profitability. Analysts said it will extend Ciena's reach by adding a company whose strength is in metropolitan networks.

Ciena will pay $900 million in stock and assume $300 million in ONI Systems debt.

"Together, it's a powerful team," said Mark Lutkowitz, a telecommunications analyst for Charlottesville, Va.-based Communications Industry Researchers Inc. "Ciena has been looking for additional revenue streams, and this was just a logical thing to do."

The deal will bring Ciena a company that had $195.7 million in sales last year. It would be the first time Ciena has bought a company that has any revenue or is publicly held, Ciena spokesman Glenn Jasper said.

It will also be the largest in terms of employees - 700 - and range and maturity of products, he said.

The combined company will operate under the Ciena name and will be based in Linthicum. The purchase, subject to approval from shareholders of both companies and government regulators, is expected to close in the second or third quarter of this year.

Rick Schafer, a research analyst for CIBC World Markets in Denver, said the deal also marks the first time one large, publicly traded optical networking company buys another and signals the beginning of a wave of consolidation.

"I think this is probably the first domino to fall," Schafer said.

"You've seen smaller acquisitions, big publics for small privates," he said. "But this is your first big public for another big public."

The companies struck the agreement after a year during which their stocks have plunged about 90 percent. Under the terms of the deal, ONI Systems shareholders will get 0.7104 shares of Ciena stock for each outstanding ONI Systems share. Based on Friday's closing price, that values ONI Systems at $6.20 per share, a 12 percent premium.

Ciena's shares have closed as high as $94 in the past year, and ONI Systems shares' 52-week high was $50.63.

Stock markets were closed yesterday.

The companies said in a statement yesterday that the deal would allow them to consolidate resources, but top executives from both companies said it was too soon to say if it would lead to layoffs. Ciena employs about 3,000.

This month, reflecting the slowdown in business from struggling telecommunications carriers, Ciena laid off 400 workers and significantly cut its revenue forecasts for its fiscal first quarter, which it expects to report Thursday. The job cuts - about 12 percent of its work force - took place after 380 workers were laid off in November. The company posted a $1.8 billion loss in its fourth quarter, which ended Oct. 31.

ONI Systems reported a $188.3 million loss for 2001.

The deal builds on Ciena's $1.1 billion purchase last year of privately held Cyras Systems Inc., another California company that makes optical switching systems for metropolitan networks.

Ciena officials said ONI Systems' products complement Cyras'. One of ONI Systems' products, known in the industry as a pizza box, can be installed in the basement of a building and can provide services such as backup data storage to customers in that building.

Ciena's two main products handle long-distance transmissions: one ships beams of light carrying information from city to city and the other decides the best route for those beams of light.

"We give the new Ciena the ability to have optical technologies go all the way out to the edge of the network to the end-user," said Hugh Martin, chairman, president and chief executive officer of ONI Systems.

Gary B. Smith, Ciena president and chief executive, said the deal is consistent with the firm's vision and will strengthen the business.

"During this downturn in the telecom world, we're in the fortunate position that we can play to win," Smith said. "We don't have to just play to survive, like many of our competitors, and this is further testimony to that."

Lutkowitz, the industry analyst, said Ciena was weak in the market of metropolitan equipment. "Of course they've got products, but the products weren't up to snuff," he said.

The deal puts Ciena in a stronger position. "This is not some fly-by-night startup," he said of ONI Systems.

The acquisition is expected to "accelerate Ciena's return to profitability," Smith said.

If the deal goes through, it could cut Ciena's operating expenses by $55 million to $65 million a year and cut manufacturing costs, the companies said. Ciena is expected to have about $1.3 billion of cash net of debt by January.

Martin will help combine the companies but is not expected to stay long term. "A company can really have only one CEO, and Gary is doing a terrific job," he said.

Other ONI Systems executives, however, will help head up Ciena's metropolitan transport and switching division, the companies said.

Joe Gladue, a telecom equipment analyst for Chapman Co. in Baltimore, said integrating the businesses' products would make for a strong company.

"They now have a larger combined, installed customer base, and that can be a competitive advantage," Gladue said.

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