Tellabs Cancels Plans to Acquire Ciena; Firm's Sagging Prospects Doomed Deal
September 15, 1998
By THOMAS E. WEBER
Staff Reporter of THE WALL STREET JOURNAL
Ciena Corp.'s planned acquisition by Tellabs Inc. finally crumbled after
weeks of speculation that Ciena's sagging prospects would doom the union
of the two telephone-equipment makers.
News of the canceled deal sent the already-depressed shares of Ciena
plunging an additional 17% -- putting them down a staggering 77% from the
day before the deal was announced June 3. Tellabs shares, which have
flagged in recent weeks over concern that the planned Ciena purchase was
flawed, tumbled 16% as the company cautioned analysts to lower their
earnings estimates.
Separately, Ciena posted net income of $2.1 million, or two cents a
diluted share, for its fiscal third quarter ended July 31, down 94%
from $35.7 million, or 34 cents a share, a year earlier.Third-quarter
revenue edged up 6% to $129.1 million from $121.8 million.
Excluding a settlement charge and costs associated with the merger
plan, profit at the Linthicum, Md., company would have been about
15 cents a share, essentially in line with Wall Street expectations.
The merger's collapse marked the end of a 3 1/2-month saga. Though
originally lauded as a union that would bring together two hot makers of
telephone-network equipment with complementary product lines, the deal
became untenable amid growing concerns about Ciena's business. One
event that particularly unsettled investors was AT&T Corp.'s announcement
last month that it wouldn't use a Ciena product.
No 'Vote of Confidence'
By the end of last week, it had become painfully clear that Ciena's plunging
share price would necessitate at least a severe renegotiation of the deal's
terms if not an outright scuttling. "The stock price did not reflect a vote of
confidence for board approval," said Patrick Nettles, Ciena's president and
chief executive.
Some Key Signposts Along the Way:
June 3: Tellabs Inc. says it will buy Ciena Corp. for about $6.9 billion in stock.
Aug. 17: Ciena warns of disappointing third-quarter results.
Aug. 21: AT&T Corp. says it won't buy Ciena's 40-channel
fiber-optic system. Tellabs and Ciena postpone votes on their merger.
Aug. 28: Tellabs revises downward the terms of its bid. The deal is
now valued at $3.98 billion.
Sept. 2: The companies postpone votes on their merger for the second time.
Sept. 14: The Tellabs-Ciena deal is called off.
Tellabs, Lisle, Ill., had originally agreed to pay one of its shares for each
Ciena share. Last month, with Ciena's market capitalization falling, Tellabs
renegotiated its bid to pay 0.8 share for each Ciena share. That cut the value
of the deal to about $4 billion from $7 billion.
Mr. Nettles said it became clear that a deal would only have been palatable
to Tellabs at a bid much lower than 0.8 share for each Ciena share. "Our
view was that undervalued Ciena," he said.
The aborted deal has proved an embarrassment for investment banks
Goldman, Sachs & Co. and Morgan Stanley Dean Witter & Co., which
respectively represented Tellabs and Ciena. It has also been a disaster for
Wall Street takeover traders betting on a completed deal.
Even so, both companies maintained Monday that the merger would have
been a good strategic fit. "I'm disappointed," said Michael J. Birck, president
and chief executive of Tellabs. But earlier this month, with earnings
concerns beginning to surface at Ciena, "we began to talk about how our
shareholders would react. And I said, 'I think we're approaching the point of
intolerance.' "
Saturday Meeting
Ciena's board met on Saturday to review options and concluded a deal was
unlikely. Then on Sunday, Tellabs board members assembled to terminate
the deal formally.
Patrick Houghton, an analyst at Wheat First Union, agreed that the
companies would have been a good match strategically. "But lately people
were saying, there's no way this can be accretive" to earnings, Mr.
Houghton said.
Tellabs also cautioned analysts that third-quarter earnings per share would
be essentially flat with second-quarter results. Ciena, meanwhile, said
fourth-quarter revenue will be "materially below" third-quarter levels.
In Nasdaq Stock Market trading Monday, Ciena stock fell $2.75 to
$13.1875, while Tellabs shares fell $7.3125 to $37.6875.
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