Ciena suspects foul play
Telecom-equipment maker believes rival thwarted its $4.7B Tellabs merger
September 16, 1998: 1:58 p.m. ET
Ciena-Tellabs deal is off - Sept. 14, 1998
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Ciena
Tellabs
NEW YORK (CNNfn) - The failed merger of Ciena Corp. and Tellabs Inc. has left Ciena executives pointing fingers at competitors.
<Picture>In a document filed with the Securities and Exchange Commission Monday, Ciena said it has been gathering evidence to support its theory that a competitor thwarted its $4.7-billion merger attempt with Tellabs.
<Picture>The company said it believes an industry rival "may have engaged in targeted and legally questionable activities" that helped drive down Ciena's stock price and led to the collapse of the deal.
<Picture>Analysts, however, say the filing is likely nothing more than a manifestation of Ciena's frustration.
<Picture>"I think it's just sour grapes," said Michael Nieberg, of Furman Selz.
<Picture>In the wake of the collapsed merger, Nieberg revised downward Ciena's next year earnings estimate to 40 cents, from 65 cents per share. He expects the company to post a loss in the current quarter of about 5 cents a share.
<Picture>Tellabs agreed to acquire Ciena in June in a 1-for-1 stock swap valued at $6.9 billion, part of its long-term strategy to take on larger rivals Lucent Technologies Inc. (LU) and Canada's Northern Telecom Ltd. (NT)
<Picture>But half an hour before shareholders were set to vote on the transaction, AT&T Corp. announced it would not buy Ciena's technology. AT&T was testing Ciena's product, which boosts fiber-optic line capacity, but said it decided to stop considering the technology. Shortly thereafter, Ciena's stock fell sharply, the merger vote was postponed, and Tellabs revalued the merger at $4.7 billion.
<Picture>Ciena's stock price has plummeted to about 13 from nearly 90 since July, due largely to the AT&T decision.
<Picture>The company was dealt a second blow last week when Digital Teleport Inc., one of Ciena's customers, named a unit of Pirelli SpA as one of its suppliers of fiber-optic network equipment in a $240 million deal.
<Picture>Poor earnings reports haven't helped matters either.
<Picture>The Tellabs merger was called off Monday after Ciena said its falling stock price left little chance that shareholders would approve the deal.
<Picture>Ciena did not name the "legally questionable" competitor in its SEC filing and hasn't asked regulators to investigate.
<Picture>But the Washington Post reports that Ciena's Chief Executive, Patrick Nettles, said Monday after the merger was called off that AT&T's announcement just minutes before shareholders were to vote on the merger was "a very peculiar coincidence." He reportedly added: "I don't believe in coincidences."
<Picture>Lucent, a telecommunications-equipment maker, was spun off of AT&T but still has close ties with the company. AT&T leases laboratory space from Lucent in a building the two companies share in Holmdel, N.J., the Post reports.
<Picture>In response to the reports, Lucent Technologies (LU) spokesman Bill Price said the company was "in no way involved in the AT&T decision on Ciena."
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What's next?
<Picture>Analysts say Tellabs is unlikely to seek another merger partner anytime soon, since the company is well positioned for growth. But its ultimate strategy is to go head-to-head with Lucent and other big-league rivals, and reaching that level of competition will require a merger or acquisition down the road, analysts say.
<Picture>Ciena may be another story.
<Picture>While still an industry leader, the company's stock is now undervalued, making it a likely takeover target from acquisition hungry competitors.
<Picture>Wall Street speculates Cisco Systems is a likely acquirer, despite Cisco's indications otherwise.
<Picture>"That's been talked about a lot, and the reason for that talk is because Cisco and Ciena have collaborated on several contracts for telephone companies. They know each other," said David Toung, an analyst for Argus Research. "The compelling logic is that since Cisco wants to extend into the telecom area, by buying Ciena it would give them access to equipment, technology and customer relationships."
<Picture>He added companies generally don't comment on pending mergers because it can drive the stock, and therefore acquisition, price up.
<Picture>Cisco Systems Inc. agreed Tuesday to buy Clarity Wireless for stock valued at about $157 million, the latest of more than a dozen acquisitions Cisco has completed since 1995.
<Picture>Others in the industry believe Ascend Communications, of Alameda, Calif., is a likely candidate for a merger with Ciena.
<Picture>Ascend (ASND) also has indicated its intent to move more aggressively into the telecom space, Toung said.
<Picture>Shares of Ciena (CIEN) were down 11/16, more than 5 percent, at 12-5/16 on the Nadsaq Wednesday morning, while shares of Tellab (TLAB) were up 1-5/8 at 42-7/8. <Picture: Link to top> |
