A (Technical)Overview Of Today's Acquisitions.
by: BFMX (46/M)
45260 of 45273
It is very easy, at first glance, to characterize todays developments as financial folly. After all, with these deals, CIEN is giving up 1/3 of its company, forfeiting much of its '99 earnings, and absorbing a great amount of execution risk. And all this merely to acquire companies which not only did not exist 2 years ago, but they have neither revenue nor marketable products.
Hence, the markets reflexive reaction in devaluing the equity. An understandble repsonse, as there is a meaningful increase in the perceived risk of the equity.
However, that perception too will change.
The companies being acquired may not be widely known to Main Street, but were introduced to those priveleged (including myself)to attend Goldmans recent technology retreat in California. Here is what I can share with you and why I believe these acquisitions, if executed properly, can add considerable value to the CIEN franchise.
FIrst, Omnia developed a multi service delivery product as a solution for carrier class networks. Called AXR 500, it combines voice and data via ATM technology. As a result, they can integrate the functionality of digital cross connect, add/drop multiplexers, digital loop carriers, and access routers. By efficiently delivering optical
bandwidth, a local provider can provision data and voice in 1 optical interface. The company was funded by Charles River Ventures, who was among those that provided the seed money for CIEN.
Lightera has developed a means to eliminate the need for SONET/SDH add-drop muliplexers and cross connects. It offers a platform that has fewer but more intelligent devices. By incorporating the functions into 1 central switch, a signal is converted from optical to electronic. The core will be optical based, creating a meshed or ring based network. In effect, the signal can switch hundreds of OC-48 channels. This cell/packet architecture will compete against Lucents Bandwidth Manager, as it displaces digital cross connects and
SONET/ATM. The company's founders include Charlie Chi, formerly of CIEN.
So what do these deals mean to CIEN?
In essence, it transforms the company from a single product firm to one that can offer a full suite of access capabilty and next generation transport. CIEN has placed what I believe is a prudent bet that the future lies in integrating access, transport management, and bandwidth management. With these deals, CIEN can offset the bundling price schemes of its larger competitors by providing an unparalled portfolio of end-end solutions.
Customers should be quite pleased with the flexibilites provided by what may be an emerging juggarnaut in teleco equipment. It is not insignificant to CIEN that both Omni and Lightera have already built significant customer relationships.
These deals also give CIEN the ability to improve its margins, as there will be undoubtedly less pricing pressure resulting from the diverse and one-stop product offerings.
In a nutshell, CIEN is taking the industry to a new level, offering high intelligent optical transport, something which is especially important to the Metro market. This should also be quite effective with the explosive market encompassing long haul carriers, ISP's, and CLEC's.
These deals have the clear potential to expand margins and enhance growth rates. When viewed in that light, the wisdom of accepting near term earnings dilution (in a year that was basically a throw-away as far as earnings)and greater short term risk becames clearer.
The key is execution. The reward is higher valuation. In my opinion, the odds strongly favor CIEN.
Posted: Mar 15 1999 1:52PM EST as a reply to: Msg 1 by YahooFinance
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