Ciena's Story Gets Better - Taken from Upside
The Take
March 16, 1999
by Phil Harvey
How well can Ciena (CIEN) continue to sell its long-term vision to investors? That's the big question after the company said Monday it would purchase Lightera Networks and Omnia Communications, two private optical communication companies, for a combined $980 million.
As Ciena said it would see $13 million in expenses from the acquisitions, investors hoping for better quarterly numbers from the company just got put on hold.
The good news is that the purchases bump Ciena up into a new marketplace, giving it the capability to offer a range of networking solutions above and beyond just helping service providers increase the capacity of their networks. As Steve Chaddick, Ciena's senior vice president of strategy and corporate development, tells Upside Today, Ciena's new partners make it possible for the company to "reduce the cost of bandwidth while simplifying the network."
But while Ciena customers' networks may become simplified and enhanced, analysts wonder whether the same can be said for Ciena's corporate future. Judging by investor sentiment Monday, the answer is no. Despite a broad market rally, shares in Ciena tumbled 2 1/16 to 24 3/4 as the company said it will give up 20.6 million shares of its stock for Lightera and 16 million shares for Omnia.
Aside from those investors still burning since the proposed acquisition by Tellabs fell apart, others have shown dissent over the price Ciena paid for Lightera and Omnia. As Timothy Savageaux, an analyst at Volpe Brown Whelan & Co. declared, "My goodness, they paid a lot to do this."
Volpe Brown gives Ciena a "neutral" rating.
Savageaux, who says he's surprised Ciena's stock didn't drop at least five more points, agrees that Ciena appears to be on the right track for the long term, but expresses skepticism at the company's claim that its earnings will be accretive next year.
Further, Savageaux says Ciena faces a tough road ahead as rivals like Tellabs (TLAB) and Lucent (LU) are also developing technologies and products similar to the ones Ciena is acquiring, while maintaining the added advantage of a large installed base.
On the other hand, says Kevin Slocum, SoundView Technology Group's managing director of research, the Lightera Networks and Omnia Communications acquisitions increase Ciena's odds of getting its business back on an aggressive revenue track.
"For what it's worth," Slocum says, "this does for Ciena what the Tellabs acquisition would have done." Ciena's Chaddick agrees.
Slocum says SoundView maintains its "hold" rating on Ciena and adds that the company made a good decision buying its way into incremental markets.
In all, analysts feel that Ciena is heading in the right direction, but warn that many antsy investors are getting tired of trading their return on investment in for a lot of hot air about what might be, could be, or will be.
Phil Harvey (pharvey@upside.com) writes for Upside Today.
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