Ciena Corp. (Nasdaq: CIEN) today announced after the markets closed that it intends to acquire the remainder of WaveSmith Networks Inc. in a stock deal worth about $158 million.

News of the acquisition was first reported by Light Reading yesterday, after months of speculation about how Ciena might further its partnership with the startup (see Ciena Wants WaveSmith for $170M). Because Ciena was positioned as a strategic partner with WaveSmith, lending it financial and marketing muscle, the deal was anticipated by many. WaveSmith's recent victory at SBC Communications Inc. (NYSE: SBC) helped clinch it (see WaveSmith Wins at SBC and Wavesmith: Giant Killer?).

The acquisition also points out that most system startups in this economic environment need the help of a deep-pocketed partner to flourish (see WaveSmith Gets $30M, Signs With Ciena).

The news may be greeted skeptically by Ciena shareholders -- some of whom still have a bad taste in their mouth from the multibillion-dollar acquisitions of ONI Systems and Cyras Systems, which don't yet appear to be paying substantial dividends (see Ciena's K2: What Problems?). (Ciena will issue 36 million shares to acquire its remaining stake in WaveSmith.) But the acquisition is a victory for WaveSmith, in a market in which most startups are struggling for survival.

"A startup getting acquired once it has shown it can win incumbment carriers with a pragmatic solution should give hope to other startups hanging in there this year," says Scott Clavenna, president of PointEast Research LLC and director of research for Light Reading. "It remains to be seen if this is good for Ciena, but it's definitely good for the startup community."

The terms of the agreement call for WaveSmith to merge into Ciena, with all outstanding shares of WaveSmith common and preferred stock to be exchanged for the Ciena shares. Ciena will take on WaveSmith’s employee stock options, which will be converted into options to purchase Ciena shares. Ciena pegs the deal at $158 million, net of the return on its original investment. In trading today before the deal was announced, Ciena's shares dropped $0.21 (4.48%) to $4.48.

Ciena officials called the deal a move for future growth.

On a conference call held Wednesday evening, Ciena president and CEO Gary Smith said that WaveSmith's recent customer success was a major factor. "This [customer] traction in part drove the deal," he said.

Ciena officials said they expect to recognize revenues from the sale of WaveSmith products later in 2003. The deal is expected to close during Ciena's third quarter, which begins in May. In the meantime, supporting the company will add $4 million to $5 million in quarterly expenses for Ciena, said Ciena officials on the conference call.

"We believe this is the next logical step in our partership with Ciena," said WaveSmith CEO Thomas Burkardt.

Burkardt said that WaveSmith now has a total of six customers, including the SBC contract. Sources say the company is also working on a potential deal at Verizon Communications Inc. (NYSE: VZ) that WaveSmith is said to be close to winning.

— R. Scott Raynovich, US Editor, Light Reading