Ciena Grinches Cyras Execs

Executives at Cyras Systems Inc. were hoping to get a nice vest for Christmas. Instead, they'll have to wait a bit longer for their holiday gift.

That's because Ciena Corp. (Nasdaq: CIEN), which announced Tuesday that it will purchase Cyras for 27 million shares of Ciena stock (now worth about $1.7 billion), amputated the acceleration clause in the Cyras execs' option-vesting schedule in order to lock down senior management and prevent them from leaving (see Ciena To Buy Cyras for $2.6 Billion).

During Tuesday’s conference call to announce the acquisition, Ciena made certain to point this out. While the company won’t talk publicly yet about the details of the deal, it’s clear that it wants analysts and investors to know that it plans to keep as much of Cyras's top talent as possible.

“We don’t want to lose even one person,” said Denny Bilter, a Ciena spokesman.

But according to Light Reading sources, this part of the deal was a sticking point in negotiations. While the basic Cyras option plan did not call for an acceleration of options if the company was bought, senior executives had an acceleration clause written into their contracts. Essentially, these executives’ options would accelerate 12 months at the time of the sale. And because they vested on a month-to-month basis, a top person in management, who had been with the company for six months, would automatically be able to cash in 18 months worth of options at the time of the sale.

During the talks, Ciena negotiated these provisions out of the contracts, said one source who didn’t want to be named. Ciena would not comment.

A few months ago, Cyras probably wouldn’t have stood for such a concession. In fact, it consistently stated that it was headed toward an IPO. But current market conditions, coupled with recent management problems, led the company into dumping its plan for an IPO and frantically searching for a buyer (see Cyras: Crisis? What Crisis? and Another Cyras Exec Quits ).

“They were definitely shopping themselves around,” said the source. “Investors started realizing that the CEO and VP of sales had actually been forced out, and they were pressuring them to do something.”

Ultimately, the deal didn’t turn out too badly for Cyras. In exchange for giving up accelerated vesting, the company scored a price tag of roughly $1.7 billion. On the surface this might seem like a cheap deal, considering that Cerent and Siara — both, like Cyras, former Fiberlane companies — sold for roughly $7 billion and $5 billion, respectively. But that was a different time, when the stock market was at its peak. Today valuations have come down, and the price of the deal reflects that.

In fact, when the deal was first announced, just two days ago, the 27 million shares Ciena used to pay for the deal were valued at $2.6 billion. But with Ciena now trading at about $63, down from a 52-week high of $151, the deal has sunk to $1.7 billion and could go even lower, depending on trading. As share prices sink lower and lower, buyers gain the upper hand while sellers look for deals wherever they can get them -- even if it means giving up lucrative perks, such as accelerated vesting.

“Categorically, they didn’t get a bad deal,” says David McCarthy, president and founder of DWDM Recruiters LLC, a recruitment consultancy. “And most likely there is quid pro quo written into those executives’ contracts that they can cash in down the road.”

As for Ciena, eliminating any option acceleration is crucial to the long-term success of the acquisition. Companies that didn’t negotiate those clauses out of sale agreements have paid the price.

Take Lucent Technologies Inc. (NYSE: LU) as an example. The company bought Nexabit Networks in the summer of 1999 for $750 million. The entire staff was on an accelerated schedule that fully vested Nexabit employees one year after the acquisition. Sure enough, when July 2000 rolled around, Nexabit engineers fled Lucent as fast at they could (see Lucent Faces "Exodus of Nexabit Staff"). In the end the company was left with a product that didn’t work and none of the original engineers to continue the project.

“Allowing employees to accelerate their vesting is the last thing you want,” says McCarthy. “You might have bought a great product, but without the engineers it loses a lot of its value.”

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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