Canceled merger with Tellabs drives down Ciena stock
September 21, 1998, Issue: 1026
EE Times: Section: News
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Now flying solo, Ciena attempts to right itself
Loring Wirbel
Linthicum, Md. - Ciena Corp., the wavelength-division multi-
plexing (WDM) specialist that for two years could seemingly do
no wrong, has been through three weeks of a hell most newly
public companies only have nightmares about. Just as its
shareholders were about to approve a takeover by Tellabs Inc.
(Lisle, Ill.), Ciena faced an inexplicable decision by AT&T Co.
to discontinue testing of Ciena's 40-channel WDM system, leading
to a collapse of Ciena's stock price.
The original $7.1 billion Tellabs deal was renegotiated in early
September for $4.6 billion. But a decision by alternative carrier
Digital Telepoint Inc. to go with WDM systems from Pirelli Cable
led to another precipitous fall in Ciena stock. On Sept. 14, Ciena
announced that the merger plans with Tellabs were canceled, leading
to a third stock drop. On Sept. 15 Ciena closed at 13, representing
a 77 percent fall from its glory days on Wall Street.
Ciena chief executive Patrick Nettles announced a reorganization
under which Steve Chaddick, former Sr vice president for products
and technologies, will oversee strategy and corporate development.
It's no surprise that Chaddick will focus on extensive testing of
optical systems with carriers, and on showing the reliability and
ease of use of Ciena's DWDM systems, still the only dense-wavelength
systems to ship in large volumes.
What makes the task daunting, as Chaddick lamented during an
interview at last week's National Fiber Optic Engineering Conference
in Orlando, Fla., is that Ciena did not fail to execute in terms of
delivering products on time, and delivering products that worked.
Responding to a Wall Street perception that a company is in trouble
becomes almost an exercise in shadow boxing.
"I really don't see anything we would have done differently,"
Chaddick said. "We are shipping DWDM products, we have a sound
strategy and we have 1,500 motivated employees who are now angry
employees, perhaps justifiably so."
But Chaddick said that Nettles' decision to reorganize middle-level
management was not driven by the stock collapse, or by the end of
merger discussions with Tellabs. Instead, he said, Ciena's top
executives used the turmoil to re-examine what the customer base
was like. When Ciena first rolled out its 16-channel long-haul
DWDM systems, it had a handful of interexchange-carrier customers
like Sprint and WorldCom. With the advent of metropolitan-area
DWDM systems and denser 40-channel multiplexers, Ciena was dealing
with a larger variety of small, competitive local-exchange carriers,
second-tier interexchange carriers and other public-networking
companies that could prove more fickle in buying habits than the
large carriers.
At the same time, companies ranging from Lucent Technologies to
Cambrian Systems have begun shipping DWDM systems for both
metropolitan and long-haul networks, giving Ciena its first real
multitiered competition.
Ciena's advantage, Chaddick said, will be a detailed understanding
of performance monitoring, and a grasp of what types of electrical-
layer system protection will have to be preserved as customers try
an exotic mix of Internet Protocol over Sonet, IP-over-ATM-over-Sonet
and even IP over a raw optical DWDM layer.
Many companies are talking about abandoning all electro-optical
conversions in order to conduct all switching and routing in the
optical layer. Chaddick said that what these developers forget is
that per-port monitoring, necessary for advanced quality-of-service
features, still requires electrical-layer monitoring and network
management, something Ciena has specialized in since day one.
"There's no end to fascinating optical-networking ideas out there,
but if someone wants to build a real-world network out of view
graphs, let them try and do it," Chaddick said.
Chaddick's message was borne out in technical sessions last week
at the Orlando conference, when representatives from Bell Atlantic
and BellSouth described the heavy degree of fault testing and
dispersion studies done by Ciena researchers in building DWDM
test beds.
With a reduced share price, Ciena remains an attractive target for
Cisco Systems and other companies rumored to be interested in it,
though Chaddick would not comment on any future suitors taking
Tellabs' place. But with a reduced capital base, it is also harder
for Ciena to justify the significant amount of in-house manufacturing
and test necessary for building its proprietary systems. The company
designs its own Bragg gratings, for example, to achieve a channel
density that would not be possible using discrete optical filters.
Ciena also finds it necessary to manufacture its own optical amps
for its systems.
"We have a huge amount of money invested in developing the things
we could not outsource, including assembly of optoelectronic modules,"
Chaddick said. "Not even Lucent goes this far; it buys a lot of its
components from Corning."
Provided Ciena can expand its customer base with the right prices
and feature sets to appeal to the new, smaller breed of carrier,
the only thing the company can do is to continue on its existing
path, improving execution by delivering reliable products on time.
Fortunately, Chaddick said, customers are not responding to the
Wall Street turmoil. If anything, the events are giving the company
a positive backlash, as existing customers and new prospects say that
Ciena was hammered unnecessarily in a month of events company
executives would just as soon forget.
Copyright r 1998 CMP Media Inc.
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