BusinessWeek article. CSCO, Siemens or ASND to buy CIEN?
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TELLABS HAS A REALLY BAD DAY
Its bid for fiber-optic company Ciena
is in peril
For years, Tellabs Inc. has been one of Wall Street's favorite overachievers. The
telecom equipment maker could do no wrong as it pushed into overseas markets,
acquired several competitors, and kept revenues growing at a 30% annual clip.
But suddenly, its future as a telecom behemoth is at risk.
Tellabs' most important deal to date, a one-for-one stock swap with Ciena
Corp., is in jeopardy. On Aug. 21, AT&T unexpectedly dumped Ciena as a
potential supplier. The news sent Ciena's stock plunging 45%, from $56.78 a
share to $31.25. It later recovered only slightly, closing at $34.25 on Aug. 26.
The setback raises questions about the quality of Ciena's main product, which
multiplies the bandwidth of fiber-optic cables. And it casts doubt on the wisdom
of Tellabs' merger decision. Still, Tellabs CEO Michael J. Birck faces a thorny
dilemma: Knowing that others may be interested in Ciena, how hard should he
fight to keep the deal?
CISCO TALKS? With investors waiting impatiently, the Tellabs board huddled
for more than six hours on Aug. 25 at the company's suburban Chicago
headquarters. Birck was unavailable for comment, but sources close to the talks
expect Tellabs to offer Ciena shareholders about three-fourths of a Tellabs share
for every Ciena share, making the deal worth close to $5 billion, down from the
original $7.1 billion.
Though Ciena has said the loss of AT&T won't significantly affect earnings,
analysts say a discounted bid makes sense. Not only has Ciena lost AT&T, but it
also faces new competition that could lure away longtime customers like
WorldCom Inc.
Pursuing the merger with Ciena also makes sense for Tellabs, which makes
equipment that connects digital networks. Tellabs needs to diversify its product
line, and Ciena will help it move into the fiber-optic arena. Says John B. Leo,
vice-president of the Northern Trust Co., a Tellabs shareholder: Without Ciena
and its technology, Tellabs' growth ''might otherwise slow.''
So the risks of a lowball offer are huge, warns Michael Davies, a
telecommunications networking analyst at Punk, Ziegel & Co. in New York.
Ciena already has been approached by a second suitor. On May 6, a month after
Tellabs began its formal talks, Ciena reported in a proxy statement that an
unnamed company had expressed interest in it. That company, several analysts
say, was Cisco Systems Inc. A Cisco spokesman calls Ciena's wave division
multiplexing (WDM) product, which allows networks to carry 40 times their
normal amount, ''an important technology,'' but he wouldn't comment on a bid for
the company.
Cisco may not be the only suitor that has looked Ciena over either. Analysts
agree Ciena would fit nicely with German electronics giant Siemens or network
equipment maker Ascend Communications. Both refuse comment on bidding,
and a Siemens spokesman says the company will introduce its own, low-end
WDM product in mid-September.
Even so, analysts see a Ciena acquisition as a way for Siemens to reel in such
U.S. heavyweights as Sprint Corp. and WorldCom. For Ascend, it's the ''next
logical step,'' says Timothy J. Smith of tech research firm Dataquest Inc. Ascend,
based in Alameda, Calif., also makes digital switches but lacks the kind of optical
equipment Ciena makes. [But, Mory has said ASND will partner with (not buy) WDM vendors and it already has a joint venture with Pirelli for the product being used by WMB. Given the TLAB fiasco, it seems to have been, once again, a prescient strategy. Go Mory.]
No doubt, Birck and his board are sweating over the risk of getting trumped. But
to keep Wall Street applauding, Birck knows he has to keep finding more cards
up his sleeve.
By Roger O. Crockett in Chicago, with Andy Reinhardt in San Mateo
Updated Aug. 27, 1998 by bwwebmaster
Copyright 1998, by The McGraw-Hill Companies Inc. All rights reserved.
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