Shares of Ciena Fall 30%, Clouding Dela With Tellabs
The Wall Street Journal Interactive Edition --
September 10, 1998
(my apologies if this article was posted already).
By STEPHANIE N. MEHTA
Staff Reporter of THE WALL STREET JOURNAL
Shares of Ciena Corp. plunged 30%, fueling speculation
that Ciena's $4 billion acquisition by Tellabs Inc.,
another maker of telephone-company equipment, could
again be renegotiated or scuttled altogether.
Ciena shares were hit when Digital Teleport Inc., a closely held carrier, said it awarded a $100 million, three-year equipment contract to rival gear maker Pirelli Cables & Systems, a unit of Italian cable and tire maker Pirelli SpA. Analysts had expected Ciena, which already supplies gear to Digital Teleport, to win much of that contract.
In Nasdaq Stock Market trading, Ciena shares fell
$8.5313 to close at $19.75. Shares of Tellabs rose
$1.50 on Nasdaq to close at $44.9375.
New Questions
The plunge in Ciena's shares, coupled with fresh
concerns about the equipment maker's ability to compete
with the likes of Pirelli and Lucent Technologies Inc.,
raised new questions about whether Tellabs
shareholders would approve the proposed merger.
"Tellabs shareholders will want to feel more
comfortable with the transaction," said Nikos
Theodosopolous, an analyst with Warburg Dillon Read.
"With all that's happening, the comfort level is going
lower and lower."
Tellabs has already renegotiated the terms of the deal:
Last month it agreed to pay 0.8 Tellabs share for each
Ciena share, compared with the one-for-one stock swap
originally announced in June. That helped shave the
value of the deal to about $4 billion from nearly $7
billion.
The move followed a steady decline in Ciena
stock, prompted by two major events: Ciena
signaled last month that its fiscal third-quarter revenue
would be lower than expected; a week later, the
Linthicum, Md., company said AT&T Corp. wouldn't
buy certain Ciena gear for boosting the capacity of
fiber-optic networks.
A Tellabs spokesman declined to comment.
Denny Bilter, a Ciena spokesman, suggested the market
may have overreacted to the loss of additional Digital
Teleport business. "We haven't viewed this as a major
loss," he said.
Digital Teleport agreed to award Pirelli 80% of its
business for wave-division multiplexing equipment,
which increases the transmission capacity of fiber-optic
lines, said Gary Douglas, the company's chief financial
officer.
Ciena has been a supplier of equipment to Digital
Teleport, he noted, but the contract with Pirelli reduces
the scope of the potential relationship between the
companies. "What it came down to was a combination of
price, quality and ability to deliver," he said.
Mr. Douglas added, however, that Digital Teleport has
Ciena equipment in service and hasn't had problems
with it.
Ciena executives continue to believe in the strategic
benefits of the combination, Mr. Bilter said. Tellabs, of
Lisle, Ill., makes "digital cross connect" technology that
helps carriers manage their networks. It has
relationships with local carriers, such as the Baby Bell
telephone companies, that Ciena is trying to reach with a
new line of products. Ciena, meanwhile, specializes in
gear for fiber-optic networks, an area that Tellabs hopes
to plumb.
Volpe Brown Whelan & Co. analyst Timothy Savageaux
said he considered Wednesday's stock trading as an
indicator that investors are having serious doubts that the
merger will take place at all.
As an existing customer that fits Ciena's goal of
broadening its customer base, Digital Teleport should
have been a relatively easy contract for Ciena to keep,
he said. "It tells you more about a tightening competitive
environment and more about the likelihood of earnings
volatility," he said.
Ciena's Mr. Bilter said the company expected
competition for the contract and had built that
assumption into its plans. He said he didn't know if the
company has altered revenue estimates in light of the
decision.
"People are losing perspective on this merger," Mr.
Bilter said. "We're not putting these two companies
together for the short term."
Analysts expect Tellabs to re-examine Ciena's financial
strength and prospects in light of the Digital Teleport
decision, as they did after AT&T declined to test
Ciena's gear for a possible purchase. "Tellabs will look
hard at this piece of news and act accordingly," said
Polina Ialamova, an analyst with Madison Securities.
Ms. Ialamova said she feels Ciena is "expensive" at 0.8
Tellabs share, according to the current formula for the
takeover.
To be sure, it isn't unusual for carriers to contract with
two vendors for the same types of equipment. The
competition helps keep prices low and ensures that the
carrier always has a back-up vendor if things go awry.
But some analysts were surprised that Ciena, an early
leader in such capacity-boosting technology, wasn't
selected as the main vendor on the Digital Teleport
contract, and some industry observers were surprised
that AT&T didn't even make Ciena's 40-channel system
a back-up to another gear maker's system.
Tellabs and Ciena shareholders are expected to vote on
the merger in November.
Both Tellabs and Ciena have been Wall Street darlings
at one point or another and both have had a wild ride on
the stock market this summer. Tellabs shares are down
about 50% from a summer high of $89 a share, while
Ciena has sunk more than 75% from about $88 a share
in July. |
