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Ciena/Nortel: Oh Yes, There's Overlap

Ciena Corp. (NYSE: CIEN) might want to downplay it, but in terms of revenues, the company would overlap substantially with the Nortel Networks Ltd. Metro Ethernet Networking (MEN) business.

Ciena repeatedly used the word "complementary" in discussing today's $521 million bid for MEN. (See ITU: Ciena Bids $521M for Nortel's MEN and Smith: Why Ciena Wants to Reign Over MEN .)

But when it comes to where each company makes its money, there's a lot of overlap, Heavy Reading analyst Sterling Perrin points out in a research note published today.

Looking at individual products, there's a lot of difference between Ciena and Nortel. Ciena's CoreDirector doesn't have an analogue inside Nortel, and Nortel has a multiservice Sonet/SDH business that Ciena lacks (more on that later).

But the companies share an interest in WDM transport. And in 2008, those products represented 53 percent of Ciena's revenues and 55 percent of Nortel's optical revenues, Perrin writes.

Table 1: Ciena/Nortel WDM Overlap
Segment Ciena Products Nortel Products
Long haul/core WDM CoreStream Agility LH 1600
OME 6500 (LH configurations)
Metro/regional WDM CN 4200
Online Metro
OME 6500 (metro configurations)
OME5200/5100
Source: Heavy Reading




"Given these high percentages, the overlap in product lines should not be easily dismissed," he cautions.

Perrin, by the way, has long been in the thumbs-down camp when it comes to matching Ciena with MEN. "We continue to believe that Ciena would be better off without the Nortel acquisition," he writes.

That's not to say the deal would be all wrong for Ciena. Perrin and other analysts acknowledge that Ciena could gain from this deal by broadening its product offerings and picking up new customers, including Nortel enterprise clients that were otherwise out of reach.

Then there's that multiservice Sonet/SDH business. It's a legacy business, worth $396 million to Nortel in 2008 but filled with customers ready to upgrade to WDM gear. Ownership of MEN wouldn't guarantee Ciena those upgrades, but Perrin says Ciena told him it would rather fight for those upgrades as an incumbent, not as "the insurgent trying to break in."

"It is likely that this is the strategy Ciena has in mind for BCE Inc. (Bell Canada) (NYSE/Toronto: BCE) and Telus Corp. (NYSE: TU; Toronto: T), both of which are major Nortel customers," Perrin writes.

A MEN acquisition could also push Ciena forward in its 40-Gbit/s and 100-Gbit/s efforts.

Even though Ciena has already made a mark in 100 Gbit/s, Perrin suspects that the company has come to prefer Nortel's 100-Gbit/s technology to its own, based on talks he's had with management. And it's possible Ciena would like to own a 40-Gbit/s technology (Nortel's is home-grown) rather than continue to buy it from Opnext Inc. (Nasdaq: OPXT), he writes. (See Ciena Pushes 100-Gig and Ciena Sending 100GE Live.)

Whether it's all worth it to Ciena is still up for debate, though. In the year since Nortel first tried to sell MEN, some of the shine has come off, says Simon Leopold, an analyst with Morgan Keegan & Company Inc.

"Buying this Nortel asset is like buying a used car. You know it's a used car, but you're not sure: Has it been in an accident? Is everything working right? We know some talent has left, and we know that the value's declined. We know it's damaged goods, but we don't know by how much," Leopold says.

— Craig Matsumoto, West Coast Editor, Light Reading

olsen 12/5/2012 | 3:54:45 PM
re: Ciena/Nortel: Oh Yes, There's Overlap

I dont't get it when companies push the "no overlap" point when they announce acquisitions/mergers. The industry needs to consolidate, and they must eliminate competing product lines, and as a single entity push the best technology towards a broader customer base. Just reducing head count at the top won't cut it.

paolo.franzoi 12/5/2012 | 3:54:44 PM
re: Ciena/Nortel: Oh Yes, There's Overlap

There are two main reasons:


1 - The revenue is likely not completely additive


2 - You will have to lay off more people


seven

paolo.franzoi 12/5/2012 | 3:54:44 PM
re: Ciena/Nortel: Oh Yes, There's Overlap

olsen,


Just to be clear:


1 - The product overlap means you are going to try to shift customers from one product to another.  When you do this it gives a chance of re-bidding the equipment and losing the business.  So, short term or long overlap means lower revenue.


2 - More layoffs mean higher acquisition costs.  Integration is likely to cost more as well.


seven


 

olsen 12/5/2012 | 3:54:44 PM
re: Ciena/Nortel: Oh Yes, There's Overlap

Valid points.


1 - So I guess you have to give it time, and prove that you have a long time strategy with your acqusition/merger, "ignoring" the short time effect vs. stock price/owners.


2 - So I guess you have to be honest and responsible for your actions.

TN61 12/5/2012 | 3:52:25 PM
re: Ciena/Nortel: Oh Yes, There's Overlap Ciena is known for purchasing companies and spending too much money to integrate into the Ciena World. Ciena has lost too much money over the last year to even consider such a purchase. They need to focus on their Carrier Ethernet Products and ensure they work with their current customers. Core Director is a dying product and Ciena is working hard to replace the product. If they could succeed, with the replacement it would be the first organic Ciena product. However, who are the committed customers? By committed, I mean who has put their money on the line for the product? Ciena has built its world around AT&T and they need to realize they have other clients; who depend on their Carrier Ethernet Products and not just Core Director.
If Ciena is receiving financial guidance to purchase Nortel; they should rethink the purchase and the Ciena Board of Directors should rethink their Executive leaders. In todayGÇÖs economy it is best to spend money on current development to ensure the current and future clients are happy and not purchase other companies during a fire sale.
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