SmartMoney.com - Say What?
An Unjust Dessert
By Monica Rivituso
The Call:
To say that telecom-equipment makers have been battered and bruised for more than a year would be an understatement. As telecommunications carriers have drastically cut spending on gear and infrastructure, the equipment makers that supply them have faced a crippling falloff in revenue and earnings — and in some cases, even the threat of bankruptcy. Most considered it a foregone conclusion that struggling companies would soon join forces in a wave of industry consolidation.
Yet on Tuesday, when Ciena (NASDAQ:CIEN - news) announced it was acquiring competitor ONI Systems (NASDAQ:ONIS - news) in an all-stock transaction valued at approximately $900 million, analysts did anything but yawn. In a flurry of positive research, many said this deal is an all-out beauty. While Ciena specializes in networks stretching long distances (say between major cities), ONI focuses on the gear for metropolitan markets. Pairing two one-time powerhouses with complementary product lines looked like a masterstroke.
No one was more positive than WR Hambrecht analyst Tim Savageaux, who upped his rating on Ciena to Buy from Neutral. ``We believe this transaction likely signals the bottom in the optical-networking space, and will yield the industry's strongest next-generation focused suppliers with industry-leading products across the optical-switching, metro-transport and long-haul-transport markets,'' he told clients in a Tuesday note.
The Reality:
On Thursday morning, two days after the acquisition announcement, Ciena released its fiscal first-quarter results. Excluding charges, the company beat consensus expectations by three pennies, posting a net loss of $56.7 million, or 17 cents a share, on $162 million in revenue (vs. a profit of 19 cents a share and revenue of $352 million a year ago). But it also sharply lowered its second-quarter sales guidance, saying revenues would probably come in around $100 million — some 40% lower than analysts were expecting. Apparently, two important customers (which went unidentified) said in the past few days that they might cut back on spending plans. Ciena shares fell 12.6% on Thursday, and ended Friday down 13.3% for the week.
Wall Street analysts — including Savageaux — were shocked at the downward guidance. In a note Friday titled ``Evidently, Corporate Signaling Not What It Used to Be,'' Savageaux said: ``Ciena's dramatic reduction in guidance coincident with yesterday's in-line earnings report is the exact opposite of what we would have expected.'' He explained to clients that part of the rationale for his upgrade earlier in the week was based on the notion ``that neither company would enter into a transaction of this magnitude with further major negative financial events on the near-term horizon.'' While he said the strategic benefits of such a merger still made sense, he doubted that the deal would've been hammered out in its current form ``if both parties had full knowledge of Ciena's near-term outlook.''
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My thoughts exactly. |
