October 08, 2009|By Lorraine Mirabella | Lorraine Mirabella,lorraine.mirabella@baltsun.com
Ciena Corp.'s offer to acquire Nortel Networks Corp.'s optical networking business for $521 million would create the largest maker of network equipment in North America and position the technology company to compete more effectively on a global scale, experts said Wednesday.
Ciena, based in Linthicum, said Wednesday it has signed agreements to pay $390 million in cash and 10 million shares of Ciena common stock, valued at $131 million based on Tuesday's closing price, to acquire Toronto-based Nortel's optical networking and carrier Ethernet assets in North America, Latin America, the Caribbean and Asia.
Folding in Nortel's business could double Ciena's labor force and its revenue. Ciena had annual revenue of $902 million last year, while the Nortel assets to be acquired generated some $1.36 billion in sales last year and $556 million in the first six months of 2009.
Both companies manufacture equipment that connects communications networks, such as between cities and countries.
"It expands our customer base considerably and our geographical reach," said Gary Smith, Ciena's president and chief executive officer, in an interview Wednesday. "It deepens our technology in the same area we're in and provides a lot of scale for the company in terms of global reach."
Ciena, which employs 2,110, including 700 in Maryland, said it would offer jobs to at least 2,000 Nortel employees, which represents more than 85 percent of Nortel's optical networking and Ethernet workers. Smith said it is too early to say if the acquisition would lead to growth in Ciena's Maryland work force.
Nortel has been operating under Chapter 11 protection of the U.S. Bankruptcy Code since January, when it also sought creditor protection under the Companies' Creditors Arrangement Act in Canada.
Under bankruptcy rules, Nortel must file its asset sale agreement with the court and make a motion to establish bidding for an auction that would allow qualified bidders to submit better offers. Nortel will also file a similar motion with the Ontario Superior Court of Justice. After the bidding process, expected to happen within the next couple of months, final approval is required of both the U.S. and Canadian courts.
One analyst Wednesday said Ciena is unlikely to emerge the winning bidder in what is likely to be a competitive auction. In other auctions of Nortel businesses this year, winning bids have come with higher price tags than the initial "stalking horse" offers.
"I certainly think there will be more bids forthcoming," said Michael Genovese, a principal analyst with Soleil Securities in New York, who said companies such as Cisco Systems Inc., Ericsson and Nokia would be likely rivals, "so the price is going higher, and I don't think Ciena is going to go much higher."
Genovese, who recommends Ciena stock, said the acquisition could be a bad idea for Ciena.
"What's attractive about Ciena is they have these next-generation products ... that are high-growth, high-margin products, and they can improve their financial performance just selling products they already have," he said, while Nortel has "unattractive legacy technology with low margins."
But Blair King, a senior research analyst with Avondale Partners LLC in Nashville, said such an acquisition makes sense at what he called a deeply discounted offer.
"It sets them up well to compete," he said. "Having scale will help as they compete for market share."
However, he said, it could be a challenge to integrate a 2,000-person work force.
Smith, Ciena's chief executive, said the acquisition would allow Ciena to accelerate its growth plans by two to three years.
"Ciena has been one of the fastest-growing companies in our space for the last four or five years, and we have a strong balance sheet," Smith said. "This is one of these unique opportunities, given the bankruptcy, where we can accelerate our strategy."
He added that Ciena remains in a strong position with or without the acquisition.
The president of Nortel's Metro Ethernet Networks called the offer a positive step for Nortel's optical networking customers and employees.
"The sale of these businesses to a strong and stable buyer enables the innovation of one of the foremost leaders in the optical industry to continue to thrive," said Philippe Morin, of Nortel, in a statement.
