Ciena to buy switch maker

Stock deal for WaveSmith is valued at $158 million

Mass. firm is privately held

Linthicum firm already resells its equipment

April 10, 2003|By Stacey Hirsh | Stacey Hirsh,SUN STAFF

Ciena Corp., the Linthicum maker of fiber-optic equipment, said yesterday that it agreed to buy a Massachusetts telecommunications company in a stock deal valued at $158 million.

Ciena will buy all of privately held WaveSmith Networks stock for 36 million shares of Ciena common stock. The $158 million value of those shares does not include the return of money Ciena invested in WaveSmith as part of a third round of financing of $30 million in October.

With the telecommunications sector in turmoil, Ciena is looking to regain profitability through investments in new products. The company has also said it plans to invest in research and development while cutting costs overall.

"Restoring growth and profitability to our business in this challenging environment requires that we be willing to take action to expand our addressable market to drive revenue," Gary B. Smith, Ciena's president and chief executive said in a statement.

"Through the addition of WaveSmith's products to Ciena's next-generation networking solutions, we gain access to a substantial incremental market opportunity for Ciena."

WaveSmith, founded in 2000 and based in Acton, Mass., makes multi-service switches that collect information and move it onto the network - essentially acting as an onramp for the information superhighway.

Ciena already sells switches, but not for the edge of the network and not to manage smaller amounts of information.

WaveSmith's switches are less expensive to buy and run, operate more efficiently and have more features than other switches, said Denny Bilter, senior director of marketing for Ciena.

"This is an investment in a company that offers a product that we don't offer today," Bilter said.

Ciena said in a press release that Infonetics Research estimates WaveSmith's market will grow to almost $4 billion by 2006, from about $2.4 billion this year.

Rick Schafer, a research analyst for CIBC World Markets, called the deal a good strategic move for Ciena.

He said WaveSmith already has relationships with the regional Bell operating companies, including a contract with one of them, SBC Services Inc.

"It's a good time to strengthen your arsenal," Schafer said, "and there's not a whole lot of guys out there with traction."

Ciena expects the acquisition to increase its 2004 earnings, not including one-time charges.

"The question is how dilutive is it going to be this year? What's it going to do to their burn rate this year?" Schafer asked.

Ciena already had an agreement to resell WaveSmith's equipment. The acquisition is expected to close during Ciena's fiscal third quarter, subject to approval by WaveSmith stockholders and government regulators.

Both companies' board of directors approved the deal.

WaveSmith, which employs about 100 and has six announced customers, will continue to operate in Massachusetts.

None of the WaveSmith jobs overlap with Ciena jobs, so the acquisition is not likely to prompt layoffs, said Ciena's Bilter.

The acquisition was announced after the close of the market yesterday. Shares of Ciena fell 21 cents, or 4.48 percent, to close at $4.48.

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