Smith: Why Ciena Wants to Reign Over MEN

Ciena Corp. (Nasdaq: CIEN) insists it's ready to take on the Nortel Networks Ltd. Metro Ethernet Networks (MEN) assets, should it win the likely bidding war that kicked off today.

"We've got the wherewithall to pull this off financally, no question. And the fact that this is such a good fit makes it easier from an integration point of view," Ciena CEO Gary Smith tells Light Reading.

The merger -- for $521 million in cash and stock, with Ciena likely offering jobs to 2,000 of MEN's 2,300 employees -- would appear to make Ciena the largest North American provider of optical networking gear. Ciena would roughly double its size, both in terms of employees and revenues. (See ITU: Ciena Bids $521M for Nortel's MEN.)

On a conference call this morning, Smith told analysts the acquisition would accelerate Ciena's product plans by two to three years.

"We fully recognize this is a big challenge. Even though we have done, as Ciena, multiple mergers over the years, this is bigger than anything we've ever tackled," Smith said.

To that end, Ciena is assembling an integration team that includes people who've done big mergers -- some of which didn't work, Smith said. That will give Ciena firsthand expertise at what can go wrong.

Ciena insists that the deal is "complementary" -- that is, the products don't overlap as much as some analysts fear. Ciena would gain technologies, including Nortel's undersea and long-haul transport gear. Officials are also happy about the prospect of picking up MEN's customers, even though some of them have reportedly defected.

Ciena was considered a probable bidder for MEN even a year ago, when Nortel first put the division up for sale. (See Nortel to Sell Carrier Ethernet, Optical Biz, Is Ciena Ogling MEN? , and Who's Waving Their Wad at Nortel’s MEN?) So, what took so long?

"I don't know if people appreciate this: The agreement as a stalking horse is a binding agreement," Smith says. "It is a full-scale agreement. I don't think people understand that. If you don't get any other bidders, you're bound by the courts to honor the agreement."

Financially, the company is on steady ground, with $1.06 billion in cash and short-term investments. The initial bid would drain $390 million of that. Ciena also expects it would spend $180 million in integration costs.

Most of those costs would be incurred right away, because Ciena would have to construct back-office infrastructure for MEN. That's an effect of the deal being an asset sale, rather than the sale of a complete working company, Smith says. Ciena would benefit from not inheriting the overhead associated with MEN -- but, in a sense, it would have to create that overhead itself.

Although Smith isn't worried about the purchase price so far, it could rise if any other bidders emerge, with a subsequent auction likely to occur in November. And analyst Michael Genovese of Soleil Securities Group Inc. lists Cisco Systems Inc. (Nasdaq: CSCO), Ericsson AB (Nasdaq: ERIC), Infinera Corp. (Nasdaq: INFN), and Nokia Siemens Networks as probable suitors.

In early afternoon trading, Ciena shares were up 47 cents (3.6%) at $13.52.

— Craig Matsumoto, West Coast Editor, Light Reading