Sorry, didn't have time to ferret this out until now. This is the only comprehensive story on the busted Ciena deal that I could find. Quite obviously, AT&T/Lucent engaged in a orchestrated dirty tricks campaign to foil this merger at critical junctures. Also, it's a good idea to read Ciena's PR during this period:
ciena.com
Also note that this story's discussion about the busted shareholder vote on August 21 has to deal with T not buying Ciena's 40 channel product. T also decided to halt testing on Ciena's 16 channel product in July. Funny, neither Sprint nor MCI Worldcom has had major issues with Ciena's wares...
Copyright 1998 The New York Times Company
The New York Times
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September 21, 1998, Monday, Late Edition - Final
SECTION: Section C; Page 1; Column 2; Business/Financial Desk
LENGTH: 1671 words
HEADLINE: The Story of a Failed Merger Proves to Be a Page Turner
BYLINE: By LAURA M. HOLSON
BODY:
It wasn't uncommon for Michael J. Birck, chief executive of Tellabs Inc. to arrive early at his headquarters office in Lisle, Ill. But on Friday, Aug. 21, he was earlier than usual. The company's shareholders were set to vote on the much-awaited merger with the Ciena Corporation, a telecommunications equipment maker, and he had a few slides to go over before his 10 A.M. presentation.
As he shuffled through a stack of transparencies, his investor relations officer knocked on the door with curious news. Kevin Slocum, an analyst from Soundview Financial Group, had just called to say that AT&T, a potentially large Ciena customer, had abruptly halted its test-run of Ciena's flagship product. "I don't know what to do with this," the officer said.
Mr. Birck, who had heard nothing of the sort from Ciena and who knew that analysts sometimes called with mistaken or misleading tips, decided to ignore the message as so much noise in the industry channel.
He wishes now he had listened harder. For he was stunned when -- minutes before shareholders were to vote -- Patrick H. Nettles, Ciena's president and chief executive, called with the same troubling news. AT&T had just told him it had pulled the plug on its Ciena test.
Mr. Birck recalls wondering how the analyst had known even as the executive helped draft the two-sentence press release he would soon read to a puzzled group of shareholders in a company auditorium, informing them that the merger vote would be delayed, pending further review.
And in an interview last week, Mr. Birck himself still sounded a bit puzzled. "Some things just stand out as a little difficult to explain," he said.
Almost four months after Ciena and Tellabs announced what some hailed as the perfect combination, the companies called off their $7.1 billion merger last Monday, ending one of the oddest corporate dramas in recent memory. Or make that melodrama -- given the intrigue, charges of corporate sabotage, laments of fortunes lost, even a quarterly report that has proved to be a page turner.
Blame it in part on the stock market's plunge, or on the ever-shifting sands of information technology. But in many ways, the demise of the Tellabs-Ciena merger is a tale unto itself.
"I don't know what this is going to say about us in time -- the notoriety of not only working on one of the biggest mergers in technology history, but also one of the most bizarre," said Dan McCurdy, vice president for marketing and strategic transactions at Ciena, based in Linthicum, Md.
No one escaped unscathed. Investors who bought stock in Ciena at the July high of $92.375 have seen the value of those shares plummet 87 percent, to close at $11.5625 last Friday. Tellabs's stock price has tumbled 55 percent. And both companies, not to mention their investment bankers and the analysts who follow them, are more than a little embarrassed. Not only did they underestimate how quickly Ciena's technology would come to be viewed as a commodity driven largely by price, but also the mercurial nature of anxious investors.
The surprises were not as sudden as they may have seemed from the outside. Mr. Birck, in fact, said he had been nervous about the merger since mid-August, despite telling reporters then that the deal was "absolutely on schedule."
When Tellabs agreed to acquire Ciena in June for stock, the attraction was chiefly Ciena's vaunted technology that can vastly increase the information-carrying capacity of fiber optic cables. Those capabilities would complement Tellabs's core product -- equipment that enables digital circuits to communicate with one another in public telecommunications networks. And with Tellabs' well-trained sales force, Ciena could expand its small customer list, making the combined two powerful enough to take on bigger rivals like Lucent Technologies and Alcatel Alsthom.
But the one thing Mr. Birck did not want was a deal that would dilute future earnings. That did not appear to be a problem, because analysts had estimated Ciena's fiscal 1999 revenue at $880 million. But then came a warning from Mr. Nettles on Aug. 14 that third-quarter earnings would be less than half of estimates, in part because of delays in a $25 million order Ciena had been expecting from a regional carrier, Digital Teleport Inc. The company, concerned about price, ultimately gave the contract to an affiliate of Pirelli S.p.A., an Italian tire and cable company.
"We began to do a little bit of soul- searching," Mr. Birck said. "We thought it was now a riskier venture."
So did investors, after Ciena announced the projected shortfall that same day. Its stock fell from a high of $61 a share that day to close at $54.125, an 11 percent drop. Tellabs' share price fell as well -- 8 percent -- to close at $58.125.
The next Friday brought word that AT&T had abandoned its Ciena test. After hearing that the analyst, Mr. Slocum, knew this before Ciena, Mr. Nettles called his AT&T contact, hoping to ferret out the source of the leak. (Ciena executives said they had communicated with Mr. Slocum, too, which he confirmed, though neither party would comment further.)
Mr. Nettles was concerned with AT&T's ties to Ciena's rival, Lucent, which had been spun off from AT&T less than two years earlier. But when he asked another AT&T contact to talk to the chairman and chief executive, C. Michael Armstrong, about the canceled tests, Mr. Nettles said he was discouraged from doing so.
Mr. Nettles had long considered the AT&T-Lucent relationship a bit too cozy. AT&T, he said, tested Ciena's products in a laboratory on the same floor of a building that AT&T shared with Lucent engineers.
Although the laboratory was secured by locks, he said, mysterious accidents occurred with the Ciena test equipment. Once, some fiber optic cables were found broken. Another time, a power-supply circuit board failed during a test, filling the area with smoke from melted plastic. "It is the only example of it ever happening," Mr. Nettles said. "AT&T had control of that space. But who knows how much?"
AT&T declined to comment.
Ciena's relationship may have soured because AT&T demanded more timely responses to its questions about the products being tested. Mr. Nettles concedes that Ciena sometimes fell short in this regard.
In any case, Ciena and Tellabs share prices took another hit when they disclosed news of the AT&T cancellation. And even a week later, when they announced a renegotiated $4.74 billion price tag for Ciena -- the result of a five-hour session at Tellabs' lawyers offices in Washington on the evening of Wednesday, Aug. 26 -- investors were far from reassured.
"We figured lightning could always strike twice," said one trader who stampeded out of the stock on Friday, Aug. 28, racking up losses of more than $1 million. And some people in the industry estimate that arbitragers -- who trade in takeover stocks -- have lost as much as $500 million on their investments in both Tellabs and Ciena, which could wipe out many of the arbitragers' monthly, if not yearly, profits.
Meanwhile, back at Tellabs headquarters that same Friday, the investor relations officer, Tom Scottino, received an anonymous E-mail stating that Ciena falsified test results on certain equipment -- a copy of which had been sent to CNBC. "This one seemed so bizarre I forwarded it to our general counsel," Mr. Scottino said.
And to Ciena executives, who sought to find the author. Ciena executives have concluded that it was sent at 3:47 A.M. and say it can be traced back to an Internet account that was established the previous day, with the message originating from an unspecified Lucent office in New Jersey. Mr. McCurdy of Ciena described the E-mail's message as a twisting of facts based on confidential information that "no one outside of AT&T would know."
AT&T would not comment. And Mr. Nettles stops short of accusing AT&T or Lucent of sabotage. "I have not made accusations," he said. But his lawyers are demanding an explanation. A Lucent spokesman said last Friday that the company had not received a copy of the E-mail, but would investigate any evidence of wrongdoing.
But Mr. Nettles had more serious problems on his mind than the mysterious E-mail when he called Mr. Birck with more alarming news on the Friday before Labor Day. Ciena's management had re-analyzed its business prospects and found that "fourth-quarter revenues could go as low as $90 million," Mr. Nettles told him. The first quarter of 1999 looked about the same.
"Isn't that a loss?" a surprised Mr. Birck asked.
"Yes," Mr. Nettles replied.
Mr. Birck sighed. Word of the third-quarter revenue shortfall had been bad enough. Now this bombshell. "I think our shareholders are going to rebel," he told Mr. Nettles. Mr. Birck knew Ciena faced stiff competition, but even analysts who had already reduced Ciena's fiscal 1999 revenue estimates had not predicted this kind of shortfall.
"At this point," Mr. Birck recalled, "it's not what you do to save this thing, but how do you get out of it." He called each of his board members personally the next week, before telling Mr. Nettles on Sept. 10 to say that termination papers would be delivered by his lawyers. When that happened, "my feeling was one of relief," Mr. Birck said.
Not so for Mr. Nettles, who now faces the challenge of keeping Ciena as a viable independent company. The company still has its acclaimed technology, he said, and $200 million in cash. But it also has a battered share price.
He conceded that Ciena could have done a better job tending to its customers while waiting for the merger to be approved. But in an unusually angry quarterly report filed with the Securities and Exchange Commission last Monday, the day the companies called off their merger, Ciena blamed an unnamed competitor and an unidentified short-seller with "orchestrated activities" that influenced adverse media coverage of the merger.
It was simply the latest twist in this most puzzling of corporate tales.
GRAPHIC: Chart: "Behind the Scenes of a Deal Gone Bad"
The multibillion-dollar merger of Tellabs and Ciena unraveled last week, in part because of the collapse of Ciena's stock price. But there was more to what happened than what the companies publicly announced.
WHAT TELLABS AND CIENA ANNOUNCED
JUNE 3 -- Tellabs says it will acquire Ciena for $7.1 billion.
AUG. 14 -- Ciena says its third-quarter earnings will be disappointing.
AUG. 21 -- Ciena says AT&T will not continue testing its equipment. Shareholder votes on the merger are delayed.
AUG. 28 -- Tellabs and Ciena announce new merger terms.
SEPT. 14 -- Tellabs and Ciena announce the merger is off.
WHAT THEY DID NOT ANNOUNCE
AUG. 21 -- Tellabs was tipped about the AT&T decision by an analyst, not by Ciena.
AUG. 26 -- Tellabs and Ciena executives renogiate terms of the merger.
AUG. 28 -- Tellabs gets an anonymous E-mail saying Ciena falsified the results of tests on its equipment.
SEPT. 4 -- The chief executives of Tellabs and Ciena talk about calling off the merger.
SEPT. 9 -- A Ciena competitor announces a sale of equipment to Digital Teleport Inc. -- an order Ciena had hoped to win.
SEPT. 14 -- Ciena claims in a filing that short-sellers and a competitor adversely affected media coverage.
(Source: Datastream)
LANGUAGE: ENGLISH
LOAD-DATE: September 29, 1998 |
