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Technology Stocks : Ciena (CIEN) -- Ignore unavailable to you. Want to Upgrade?

To: Techplayer who wrote (10076)	12/19/2000 5:33:30 PM
From: Kenneth E. Phillipps	Read Replies (3) \| Respond to of 12623

Cyras A Fit For Ciena, But Market Sours On Dilution By JOHNATHAN BURNS Of DOW JONES NEWSWIRES NEW YORK -- It took only five minutes for the folks at Cyras Systems Inc. to plaster Ciena Corp.'s (CIEN) name and corporate logo on their Website Tuesday. Now, if only Cyras could speed sales of its K2 switching product as quickly. Before market open, Ciena announced it will acquire Cyras in exchange for 27 million shares and the assumption of $150 of outstanding convertible debt. Based on Monday's closing price, the deal was valued at $2.6 billion. Wall Street reacted quickly. Investors recently sent Ciena's stock down as much as 20%, mainly on Ciena's admission that the deal will dilute fiscal year 2001 earnings by 19 cents to 22 cents a share. Analysts had expected the company to earn 70 cents a share, according to a First Call/Thomson Financial survey. "Earnings dilution of 20 cents next year is a significant portion of the 70 cents we were looking for," said Steve Levy, telecommunications equipment analyst at Lehman Brothers. But investors watching only next year's numbers will miss both Ciena's strategy and, perhaps, a subliminal message the acquisition sent. First, Cyras's switching platform fills a hole in Ciena's product line, company officials and analysts say. Additionally, it further demonstrates Ciena's intentions of being a sustainable, stand-alone company. "We've been looking at this sector for quite a while," Ciena Chief Executive Patrick Nettles said in an interview. "We focused a lot of attention on what our customers are planning to do. This is a product that is highly complimentary to our (products). It got a lot of customer interest and traction." Levy said Ciena's strategy is to push out its reach into telecommunications networks. "Certainly, from what we know about Cyras, it makes sense strategically," he said. "It fills in a hole they had in their product portfolio." The Cyras K2 switching platform, now in testing with four service providers, will sit in the metropolitan part of a telecommunications network. It will compile traffic and intelligently manage it before sending the traffic to the long-haul portion of the network, where it will feed into Ciena's CoreDirector switching platform. The end result for service providers is that the cost of managing huge volumes of traffic will be cheaper. Both the CoreDirector and K2 boxes do the job of multiple, less-intelligent boxes currently deployed in networks. "This is a logical extension of Ciena's product portfolio," said Barry Jarulzelski, lead partner of Booz Allen's global computers and electronics practice. "More and more, what's at issue is being able to offer full-optical solutions. Clearly, you need more pieces of intelligent networking deeper into the network." Which is what Ciena believes it bought. The company, citing projections by market research firm Ryan Hankin Kent, projects the demand for switches in the metropolitan network will be $8 billion next year and $11 billion in 2004. "There is a significant opportunity over the next two to five years," Nettles said. Ciena said the deal will close in the first quarter of next year. Sales from Cyras are expected to be accretive to earnings in the second half of fiscal year 2002. Currently, Cyras' K2 switching platform is expected to be commercially available in the first half of 2001. "This was a customer-driven decision," Nettles said. "Ramping up production (of the K2 product) will be a much easier task than some of the optical products, because it has a lot of electronics. The real synergy will come from bringing our sales and support channels together." The acquisition means Ciena will also be moving into another key battleground at the edge of the network. Competitors such as Nortel Networks Corp. (NT), Redback Networks Inc. (RBAK) and Cisco Systems Inc. (CSCO) have already bought their way into that part of the market, and each paid more - though some of the companies they acquired were showing revenue. Nettles said Ciena's competitors don't yet have a product that provides the granularity or can handle the amount of traffic as Cyras's K2. "We don't see Nortel having a response to this area at the moment," he said. Jarulzelski said the deal reveals that Ciena is spreading out to provide end-to-end network solutions. "It would indicate to me that they're digging in to become a sustainable player," he said. Shares of Ciena recently traded down 19.7%, or $19, to $77.38, with volume approaching 33 million shares compared to the daily average of 15.4 million. -By Johnathan Burns, Dow Jones Newswires; 201-938-2020; johnathan.burns@dowjones.com