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DWDM

Ciena and ONI: Wedding of the Year?

Wedding of the year -- or just a sign of more matchmaking to come?

In a stunning announcement today, Ciena Corp. (Nasdaq: CIEN) said it's agreed to acquire ONI Systems Inc. (Nasdaq: ONIS) in a deal valued at about $900 million (see Ciena, ONI to Merge for $900M).

It is probably not the last of the optical deals. In these tough times, optical networking companies are likely to seek partners to shore up cash reserves, reduce expenses, and plug holes in their product portfolios. Indeed, all of these reasons were cited as motivating the merger of two of the most prominent public optical networking companies.

"This is a very different kind of merger," Ciena CEO Gary Smith told Light Reading this morning. "We are playing to win, not just survive. We believe the combination of two winners is extremely compelling."

Hugh Martin, ONI Systems Inc. CEO, says the union will give ONI the bulking up it needs to serve the world's largest incumbent carriers.

"We're doing extremely well in the metro segment, and in trials and evaluations we're always on top," Martin says. "But this ensures we have the muscle to serve the largest ILECs and PTTs on a worldwide basis."

Both companies are calling the deal a merger, and Ciena says it will be listed as a tax-free reorganization. Strictly speaking, however, it's clearly an acquisition, in which each outstanding share of ONI common stock will be exchanged for 0.7104 shares of Ciena stock. When closed, ONI stakeholders will own approxmately 24 percent of the combined company.

Gary Smith will be CEO -- "I drew the short straw," he quips -- and the company will continue to be named Ciena and will still be headquartered in Linthicum, Md. ONI's Martin says he'll stay on to assure the successful integration of the two firms, then back down.

"This is bittersweet for me," Martin says. "I believe so strongly in this combination, and I'll do whatever it takes to make it happen. But a company can only have one CEO."

Martin and Smith can't say just when the two companies will achieve full integration, so it's hard to nail down when Martin will actually leave. But the transaction is subject to shareholder vote and regulatory approvals. Martin says that could take a couple of months. The press statement says the deal is expected to close by the third quarter 2002 at the latest.

The two CEOs say it's too soon to gauge the specific effects the combination will have on the workers and facilities of the two companies. Ciena expects the deal to result in $55 million to $65 million in savings. Also, Smith says, the revised accounting will give Ciena $1.3 billion in cash net of debt, $1 billion from Ciena and $300 million to $400 million from ONI.

What remains is the challenge of integration.

Ciena plans to merge its Metropolitan Transport and Switching groups with ONI under the joint leadership of Ciena senior VP Jesus Leon and ONI COO Rusty Cumpston. Rohit Sharma, cofounder and CTO of ONI, will stay on as CTO of the newly reorganized Ciena.

It's not clear yet what post Peter Evans, who just took the marketing helm at ONI (see ONI's Evans Hones the Message), will hold at the "new Ciena."

On the product front, ONI's Martin says Ciena's metro products will merge easily with ONI's. "We have a complete solution from Day One," he says. "Both companies have a strong, open architecture."

Ciena's Smith agrees. The company's MultiWave Metro products, he says, will be used to provide SDH and Sonet aggregation into ONI's platforms. A bit of tweaking will be required to make them manageable via the same software, but that's easily achieved, he says.

The merger seems to have pleased some analysts. "Together, Ciena and ONI will be in a much better position to effectively execute a strategy," says Mark Lutkowitz, VP of optical networking research at Communications Industry Researchers Inc., in today's statement.

Although the U.S. markets are closed today, stocks of both companies were reportedly up in the European markets.

Both Ciena and ONI Systems have had their share of suffering during the market downturn, albeit not as badly as some other vendors. Ciena's had layoffs, and it has struggled getting the K2 multiservice platform it purchased with the acquisition of Cyras to market (see Ciena Boosts Numbers, Cuts Jobs, Ciena Casts Cloud Over 2002, and More Cuts at Ciena).

ONI, said to be the second largest provider of metropolitan DWDM systems after Nortel Networks Corp. (NYSE/Toronto: NT), has suffered its own share of losses (see Metro DWDM Game Heats Up and ONI Posts Q4 '01 Results). Progress in Osmine certification and the possible addition of Qwest Communications International Inc. (NYSE: Q) as a possible customer, however, have balanced out the bad news.

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com

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