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Ciena To Buy Cyras for $2.6 Billion

Deal gives Ciena the equivalent of Cisco's Cerent, but it will dilute earnings [UPDATED 11AM ET]

December 19, 2000

3 Min Read
Ciena To Buy Cyras for $2.6 Billion

Ciena Corp. (Nasdaq: CIEN) announced today an agreement to buy Cyras Systems Inc. for 27 million shares of Ciena common stock (see Ciena To Acquire Cyras ).

The deal, which is worth $2.6 billion, according to Monday's closing price of Ciena's shares, strengthens Ciena's presence in the edge of optical networks -- a market that has been expanding rapidly -- by giving it a powerful Sonet-based multiservice provisioning platform (see Cyras: The Next Cerent? ).

The deal also benefits Cyras, which gets a strong sales and support infrastructure at a time when its prospects for an IPO were dimming.

The Cyras product, called K2, will compete primarily with Cisco Systems Inc.'s (Nasdaq: CSCO) 15454 and Redback Networks Inc.'s (Nasdaq: RBAK) SmartEdge, among others, but it is not yet available. By merging with Ciena, Cyras, a private company with 254 employees, will gain the sales and operational muscle to get the product into customer hands. K2 is currently in customer trials and is expected to ship in the first half of next year.

During a conference call with analysts, Ciena officials said the acqusition was "customer driven" and that Ciena engineers had already tested the product in the lab.

"This move was driven by customer demand," said Gary Smith, Ciena's President and Chief Operating Officer. He described the K2 product as "mature" and "carrier class," saying those were major factors in the decision.

Rumors of a Cyras acquisition by Ciena were first reported by Light Reading last week (see Ciena to Buy Cyras?). In early trading Tuesday, Ciena stock was down nearly 10 percent, after officials said on the conference call that the deal would dilute, or decrease, Ciena's earnings by 19 to 22 cents per share during fiscal year 2001. Prior to the deal, the company had forecast earnings per share of roughly 70 cents.

In early Tuesday trading among Ciena competitors, Redback Networks was down $6.62 (9.29 percent) at $64.69; Cisco was up $1.00 (2.33 percent); and Sycamore Networks Inc. (Nasdaq: SCMR) was down $2.38 (4.74 percent) at $47.75.

Ciena's sinking share price reflects concern about the dilutive nature of the deal, the risk in the acquisition, and the prospect of a head-to-head competition with Cisco, which has an early-mover advantage in the next-generation Sonet market. Ciena has been generally cautious about acquisitions, but not all of them have worked to the company's benefit. For example, company officials have acknowledged that an earlier acquisition of Omnia Communications Inc. has not provided the company with the expansion it had anticipated.

Ciena officials said they had sacrificed near-term profitability for long-term benefit in the new deal. They expect the Cyras acquisition to eventually be accretive, or add to earnings, during 2002. The deal expands Ciena's overall market opportunity, giving it access to a metropolitan optical networking market estimated to grow to about $10 billion over the next two years.

Intially, the deal looks reasonable, compared to what Cisco paid for Cerent ($7 billion) and what Redback paid for Siara ($5 billion). But in relative terms, the deal is similar in scale to those purchases because Ciena is buying Cyras with stock, and the stocks of all networking companies are down substantially this year. By laying out 27 million shares for Cyras, Ciena is giving up nearly 10 percent of its 286 million outstanding shares.

At one stage, Cyras was one of the optical networking industry's hottest startups, but it's hit stormy seas in recent months (see Cyras: Crisis? What Crisis? ). The company ranked sixth in Light Reading's list of Top 10 Private Companies (see Cyras Systems)

-- Peter Heywood, international editor, and R. Scott Raynovich, executive editor, Light Reading http://www.lightreading.com

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