Ciena Nabs WaveSmith

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

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chimpmeister 12/5/2012 | 12:15:46 AM
re: Ciena Nabs WaveSmith so what is the price per share of WS stock going to be?
zettabit 12/5/2012 | 12:15:42 AM
re: Ciena Nabs WaveSmith Figure this as one potential set of numbers:

WS acquisition price:
$158M (net of CIEN invest)

minus $ raised and likely liquidation preferences:
1st round $23.5 at 1x (2000)
2nd round $31M at 1.5x (June 2001)
3rd round $30M at 2x (Oct 2002)

(Note these would be very good given many funding deals being offered since the bubble burst)

Total VC "take-home pay"
= $130 approx.

Founders & exec's share of balance
= approx 60%
= approx $17M

Workers share of balance
= $11M
divided by 150 employees
= $730,000 per person

That sort of payout for the average Joe would be awesome.

However that is WIDELY dependent on the liquidation preferences. Assume a 3x preference for the last round done in 4Q/2002, and the money left for employees goes to zero.

Only an insider or one of the VCs will be able to give accurate values on this.

Obviously the founders and execs get the multi-million $ payouts. But since WS is not from California, accoriding to Booby Max's twisted peurile logic they are not crooks, so this money will be well-deserved by all.
tmc1 12/5/2012 | 12:15:41 AM
re: Ciena Nabs WaveSmith i meant non-execs... not no execs... fat fingers.
tmc1 12/5/2012 | 12:15:41 AM
re: Ciena Nabs WaveSmith zetta-dude,

your math is way wrong. it is about 73,000 per employee which equals out to about 18k bonus per year of vesting. not great but certainly not bad in this market.

i would expect that the terms are better than that for the investors and no execs will see very little except a job... maybe.
zettabit 12/5/2012 | 12:15:40 AM
re: Ciena Nabs WaveSmith tmc1,

You're right, I goofed on decimal places.

$73,000 per average Joe. Not much. And that goes quickly depending how much higher the liquidation preferences were.

I expect the founders and CEO will take home maybe $1.5M to $3M each (not the $100M they used to), and your average exec about $500k - $1M. That pays off the mortgage and all debts, but expect them to keep working for a while longer......

Only problem is they'll now have to work for Gary Smith. Yechh!
whyiswhy 12/5/2012 | 12:15:39 AM
re: Ciena Nabs WaveSmith Better guess in this market: 90% to VCs (and Ciena, ironically), 10% to common. 60% of 10% to execs, 40% of 10% to employees. That means 6.3M divided by 150 equals $42K/employee if they cash out. If they hold, and Ciena does well, then it could mean a nice retirement. Better than being on unemployment during the "optical dust bowl", but nobody is retiring, much less the execs. They now have employment contracts that cannot be broken "at will".
zettabit 12/5/2012 | 12:15:38 AM
re: Ciena Nabs WaveSmith For employees to "hold" $42,000 and get to a "nice retirement" would mean a CIEN stock price appreciation that would blow away even the some of the dot-com stock value appreciations.

No way that CIEN stock price will take off again. They are already valued as a growth stock, and have a lot of expectation built into their EXISTING stock price.
wass 12/5/2012 | 12:15:32 AM
re: Ciena Nabs WaveSmith What some more intelligent acquiring companies have done is to make the deal contingent on the VCs waving their preferential payouts.

I heard Alcatel did this when acquiring Astral Point.

If Ciena did this, the payoff may be higher for the average Joe and they would be much happier moving forward.
FormerStartUpGuy 12/5/2012 | 12:15:28 AM
re: Ciena Nabs WaveSmith It's actually much worse than you imagined, I would think.

"Total VC "take-home pay"
= $130 approx."

This leaves $28M for those holding common shares. However, the preferred shares then convert to common, so the VC's would take the lion's share of the $28M as well.

We can probably guess that they would have 70 to 80% of the common shares after the conversion. That would leave somewhere around $8.2M to $11M to split between the founders, execs, and employees.

I have no clue if any of the assumptions made in this post, or in the original, are accurate, but I think it is pretty clear that no one who actually made the company successful got a lot out of the deal.

Landing a contract with a major ILEC in this market is a big accomplishment. Too bad they probably aren't getting much of a reward for it.

rbfishing 12/5/2012 | 12:15:27 AM
re: Ciena Nabs WaveSmith Wow, what a burn rate. 4M/Month for ~150 people is HUGE. Can't believe Ciena would let that go for long. Even with RBOC contracts if they were in the market for VC money they'd have to cut that at least in half.
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