Why Ciena Agreed to the Tellabs Deal
By SETH SCHIESEL
ust as Ciena Corp. was announcing Wednesday that it had agreed
to be acquired by Tellabs Inc. for about $7.1 billion in stock,
Lucent Technologies Inc. was illustrating why Ciena saw little
future in remaining independent.
Ciena had an early lead on Lucent -- and the rest of the
telecommunications industry -- in making a complex type of
equipment that can increase the capacity of long-distance networks by
a factor of 16 or more.
But Lucent has made great strides closing the gap, and Wednesday
Lucent announced a trial in which Microsoft Corp. had agreed to
outfit its internal network with Lucent's version of the sort of
equipment made by Ciena.
By itself, Lucent's announcement was not all that significant. But set
against the backdrop of Ciena's acquisition by Tellabs, it served as a
demonstration of the market power of Lucent, the former unit of the
AT&T Corp. that is North America's largest maker of
telecommunications equipment.
The acquisition was another reminder that in the high-technology
world even the highest sorts of technology can fail to provide a
long-term business foundation. Ciena has good technology, but it does
not have the solid relationships with big customers that companies like
Lucent and Tellabs enjoy. In a market where big telecommunications
carriers want to focus on a handful of big suppliers, Ciena was
starting to feel like doors were closing.
"The suppliers are limited in companies like Bell Atlantic and
Ameritech and SBC," said Patrick Nettles, Ciena's chief executive,
referring to three of the local phone carriers. Explaining part of the
reason why Tellabs was an attractive suitor, he added, "Having
existing relationships there can certainly truncate the process of
product acceptance."
Lucent is strong in the relationships department, especially with other
former members of the AT&T family. Like Lucent, the five Bells
were once part of AT&T. When Microsoft turned to U S West for
some new technology, U S West turned to Lucent.
Tellabs is less than 5 percent of Lucent's size, with $1.2 billion in
revenue last year compared with Lucent's $26.4 billion. But as a
company that has been in business since 1975, Tellabs does have a
track record, and it does have established relations with the regional
Bells, also known as RBOCs.
Tellabs' main product, called a digital cross-connect, allows many
circuits to communicate with one another without being soldered
together.
For Ciena, the deal "is a recognition that a lot of incumbent carriers,
like the RBOCs, are going to take a more evolutionary route which
requires working very closely with companies like Tellabs," said
Steven D. Levy, a networking analyst for Salomon Smith Barney.
One reason relations with the Bells are beginning to matter to Ciena is
that the gear that Ciena makes, known as wave division multiplexing,
or WDM, equipment, is beginning to find its way from the
long-distance market into local networks.
As local phone companies begin to offer high-speed data services to
consumers, they need to beef up their systems -- hopefully without
having to rip up streets to lay new cables. WDM is well suited for
that, but Ciena is facing the expensive prospect of revamping many of
its products for use in the local market. Tellabs could also help
Ciena's future product development.
Tellabs tried to catch up in WDM on its own, but, "we began to
realize that we were a little bit too little and a little bit too late," said
Michael Birck, who will remain Tellabs' chief executive. Nettles will
be named president.
Under the terms of the deal, Ciena's shareholders will receive one
share of Tellabs stock for each share of Ciena. Tellabs' shares closed
at $65.875, up 6.25 cents, in Nasdaq trading on Tuesday, before
reports of the deal emerged; Wednesday, the stock ended at $63.8125,
down $2.0625. Ciena's shares closed at $57.5625 on Tuesday after a
run-up of $6.1875 on takeover speculation; Wednesday, its share
price closed at $61.75, up $4.1875.
Tellabs wants to treat the deal as a pooling of interests, which would
allow Tellabs to avoid having to take charges against its future
earnings to cover the difference between what it is paying for Ciena
and the assessed value of Ciena's assets. The companies expect to
complete the deal in the third quarter, after Tellabs finishes another
planned acquisition -- that of Coherent Communications Systems
Corp., a maker of equipment that enhances sound quality on
telecommunications networks, for $670 million.
Cisco Systems Inc., which has a marketing arrangement with Ciena,
was left out in the cold by Wednesday's deal, though Cisco could
mount a run of its own for Ciena. After digesting Coherent and
Ciena, Tellabs could make bids for Ascend Communications Inc. or
Advanced Fibre Communications Inc., people on Wall Street said.
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