Ciena Move Will Double Its Size

Purchase Of Nortel Assets Will Make It North America's Largest Fiber-optic Networking Gear Provider

November 24, 2009|By Gus G. Sentementes | Gus G. Sentementes,gus.sentementes@baltsun.com

In an acquisition that will double its size, Ciena Corp. said Monday that it will buy the optical-networking assets of Nortel Networks Corp. for $769 million.

The purchase - set to close in the first quarter next year - would make Linthicum-based Ciena the largest provider of fiber-optic networking gear in North America, and the third largest in the world.

"This is a transformational deal, not just for Ciena, but for the industry," said Gary Smith, Ciena's president and chief executive officer. "Nortel has the world's leading technology when it comes to optical networking. ... As we build out the Internet, Nortel is the world leader in this kind of technology."

Ciena fended off an unspecified competing bid from Nokia Siemens Networks, a joint venture between Finland's Nokia Corp. and Germany's Siemens AG, during an auction that kicked off Friday and lasted through the weekend.

Analysts' reaction to news of the acquisition was mixed, with concerns that Ciena could face some difficulties over the next several quarters in integrating the Nortel assets with its own operations.

The company's initial bid for Nortel's Metro Ethernet Networks business had started at $521 million in cash and stock, but Nokia Siemens' entrance drove up the price. Smith insisted that Ciena was "very disciplined" about how much it was paying for the Nortel assets.

Ciena agreed to pay $530 million in cash and to issue $239 million in senior convertible notes to Nortel, a Canadian company that has filed for bankruptcy protection in both that country and the United States.

The Nortel subsidiary generated $1.36 billion in revenue in 2008, and $556 million in revenue for the first six months of 2009.

By comparison, Ciena had $902.4 million in revenue last year, and $311.6 million for the first six months of this year.

Smith said the companies share similarities in the types of clients they have, which include some of the biggest phone companies in the world that use the optical networking gear to support communications on large high-speed networks.

Shares of Ciena declined nearly 9 percent, or $1.17, to close Monday at $12. Reactions from analysts who closely watch Ciena and the telecommunication equipment industry were negative or mixed, largely on concerns that the company could struggle to integrate Nortel's business with its own operations.

Michael Genovese, a principal analyst with Soleil Securities in New York, said that he thought Ciena should not have bought the Nortel assets and that the company overpaid at auction.

"Maybe 30 percent of what they bought is attractive," Genovese said. "But the other 70 percent is just older technology that's in decline. The challenge will be to convert them into new products."

He described the integration challenges that Ciena will face as "extreme." Ciena has about 2,100 employees, including 600 in Maryland, and expects to offer jobs to the Nortel subsidiary's 2,000 employees, 1,400 of whom are based in Canada.

"It's a big challenge" for Ciena over the next year, Genovese said.

Blair King, a senior research analyst with Avondale Partners LLC in Nashville, said he thought Ciena will have "a long road ahead" with the integration of Nortel but will probably get it right in the end.

"Our view is if investors are willing to look past the next couple of quarters and assume there'll be some risks with integration, they ought to be well rewarded," King said.

King said he didn't believe that Ciena overbid, but he did think they "put their balance sheet in a precarious position."

"They'll have to start generating cash and prove to the investment community that they can fix that," King said. "They're going to have to put out very clear milestones [to investors] and they're going to have to meet those milestones."

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