Story of Failed Merger Proves to Be a Page Turner
NY Times/September 21, 1998
By LAURA M. HOLSON
It wasn't uncommon for Michael Birck, chief executive of Tellabs
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 Ciena Corp., 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.
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 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.
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, 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' 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 the speed with which 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 might have seemed from the
outside. 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' 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 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 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 SpA,
an Italian tire and cable company.
"We began to do a little bit of soul-searching," 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, Slocum, knew this before Ciena,
Nettles called his AT&T contact, hoping to ferret out the source of
the leak. (Ciena executives said they had communicated with Slocum,
too, which he confirmed, though neither party would comment further.)
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, Michael Armstrong, about the canceled tests, Nettles
said he was discouraged from doing so.
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,"
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.
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," 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. -- three
hours after the renegotiating session ended -- 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.
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 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 Nettles had more serious problems on his mind than the mysterious
e-mail when he called Birck with more alarming news on the Friday
before Labor Day. Ciena's management had reanalyzed its business
prospects and found that "fourth-quarter revenues could go as low as
$90 million," Nettles told him. The first quarter of 1999 looked about
the same.
"Isn't that a loss?" a surprised Birck asked.
"Yes," Nettles replied.
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 Nettles. 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," 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 Nettles on Sept. 10
to say that termination papers would be delivered by his lawyers. When
that happened, "my feeling was one of relief," Birck said.
Not so for 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.
It was simply the latest twist in this most puzzling of corporate
tales. |
