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Optical/IP

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

yomamma 12/5/2012 | 12:12:29 AM
re: Ciena Nabs WaveSmith
hi tech hookers that's all.
WiserNow 12/5/2012 | 12:13:28 AM
re: Ciena Nabs WaveSmith This may be a deal that is good for at least some of the "little guys". Whether or not they get a stock payoff. Some of them may keep their jobs. The others will get a clean exit, with back vacation pay and some type of severance package.

Consider the number of bankruptcies in companies whose product is "almost there". BK doesn't pay out options, vacation, or severance, let alone unreimbursed employee expenses.

Those of us who are employed may not be getting the big bonuses and option payouts, but we also aren't drawing on retirement savings, turning into real estate agents or selling our homes.

Let's try to keep things in perspective.
zipple 12/5/2012 | 12:14:13 AM
re: Ciena Nabs WaveSmith "Unless Wavesmith management was not watching the details, generally liguidation preferences can be exercised OR the preferred shares convert to common. The VC decides which is the better deal. It would be rare for liquidation preferences to be exercised AND then the VC's get to share in the remainder. But I have seen deals initially structured like this but the VC's quickly relented when challenged on this point."

Yes. The acquiring company would have to be foolish not to force the VCs to drop their preferences. Of course, the VCs will whine and claim to walk away from the deal, but what is their alternative? They'll be happy with any return in this market.

Also, these days any intelligent company who's acquiring will demand that a sizable portion of the purchase goes to the common shares. There is just no incentive to pour money into the pockets of the VCs, and there is lots of incentive to line the pockets of the new employees with the knowledge base.

So, cases where the VCs screwed their companies in the past years will either

1. Have the punative terms undone, or

2. Never be acquired, because the starting point of the negotiation is too onerous for anybody to wade through the negotiation.

unfortuately, the employees get screwed in #2 as well, but they were already screwed.
rs50terra 12/5/2012 | 12:14:14 AM
re: Ciena Nabs WaveSmith And now that we have all agreed that the 'average Joe" will not be able to retire on the "huge jackpot", the question is, how many people is Ciena going to lay off.
wslittle 12/5/2012 | 12:14:31 AM
re: Ciena Nabs WaveSmith sounds like someone who replaced the free snacks with a wavesmith brand vending machine to contribute to revenue generation...

----------------------------------------------------
sounds like someone spent more time in the kitchen than contributing to revenue generation...
yomamma 12/5/2012 | 12:14:52 AM
re: Ciena Nabs WaveSmith
sounds like someone spent more time in the kitchen than contributing to revenue generation...

But hey, that Market Basket quality champagne was just great! Almost as good as the triple-pig pizza oil.

Route_495 12/5/2012 | 12:14:55 AM
re: Ciena Nabs WaveSmith
mmmmmmmmmmmmmmmmmmmmmm.....triple pig......
wslittle 12/5/2012 | 12:15:01 AM
re: Ciena Nabs WaveSmith Ratio is ~11wsn to 1cien.
Trouble is nobody gets their shares for over 1 1/2 months.
Remember this deal isn't done yet.

Ciena shareholders are just slightly ticked about the acquisition.
No matter how you look at it, this deal does not represent a value proposition for ciena, at least for the next few years. Also, WS's MPLS product doesn't exist, except in a press release. This story is far from over, even though this batch of management is (everyone is working hard stitching up these golden parachutes, too bad they laid off all the asian hard workers).

But hey, that Market Basket quality champagne was just great! Almost as good as the triple-pig pizza oil.

Good luck Ciena.
ILikeBirds 12/5/2012 | 12:15:10 AM
re: Ciena Nabs WaveSmith Hey guys- What time does our meeting at the "Rt 495 Networking Support Group" start tonight? I want to get there early because my favorite muffins, blueberry, are always the first to go. So tonight I think I'll nab two and keep the extra one around for next weeks meeting. I know what you're thinking- how does such a smart guy, and a bird lover at that, remain unemployed?

ca-caw,
ILikeBirds

http://www.495nsg.com/
zhadum 12/5/2012 | 12:15:11 AM
re: Ciena Nabs WaveSmith several comments on the numbers so far:

- acquiring company can effectively dictate the terms of the deal. for example, they can decide that of the $158M, 20% MUST go to employees and damn your vc termsheets and preferences. that is the only way they will keep their new employees engaged. and given that there was really no-one else at the table to negotiate, would the vc's walk away from the deal? (wass referred to this issue)
- 60/40 exec/nonexec ratio is high. depends on how many execs you have in the company and how many key employees joined early. this could tilt the balance toward the nonexec significantly.
- there is no such thing as average payback per employee. even in the employee ranks there is usually some disparity in the stock allocations. someone who has joined early and has put in his/her heart and soul in the company can make several times more than the average joe engineer who joined mid-way.
- it is futile to perform any price/sales ratio calculations for an early stage startup. sbc is probably just the beginning for the wavesmith product. given that it passed the battery of sbc testing, if i were a ciena exec, i would assume that this product would be successful in other accounts. with the acquirer'sales might, the predicted revenue numbers would be very different from those already announced.
- entering a new market segment is another strategic goal for the acquirer. this in itself deserves a premium.

overall, if one believes that ciena should enter the L2 market, this is a good acquisition at a fair price. on the other hand, if one believes that ciena should be more focussed on strengthening its core optical presence (and by core i do not mean the market segment) and not dabble in areas it doesnt have much exposure, any amount us too high and this is a bad acquisition.

z.
green 12/5/2012 | 12:15:15 AM
re: Ciena Nabs WaveSmith how about one of the "little fellows" at Wave Smith post the per share payback they are getting ?

I have the feeling that the "little guys" didn't make any..
Sibylle 12/5/2012 | 12:15:20 AM
re: Ciena Nabs WaveSmith >Unless Wavesmith management was not watching >the details, generally liguidation preferences >can be exercised OR the preferred shares >convert to common.

This used to be the case in the good ol' days. For the last 18 months or so the term sheets specify "AND" - liquidity preferences AND conversion to common. That would make sense too considering the dire straits the founders find themselves in - either agree and stay as CEO etc or join the legions of ex-CEOs.

From the VCs perspective - they have to milk every company for what its worth - given the crappy state of their overall portfolio. And they are justified in squeezing...

The 158 million Wavesmith (or their VCs) are getting is a remarkable price - even assuming 40 mil of revenue over the next few years. The discounted value of that can't be more than 5 mil. So the P/S is an awesome 35~40 - depending on Ciena's original stake. CSCO and JNPR are both around 5. So either Ciena knows something we don't or knows nothing at all.
PrivateCEO 12/5/2012 | 12:15:24 AM
re: Ciena Nabs WaveSmith Unless Wavesmith management was not watching the details, generally liguidation preferences can be exercised OR the preferred shares convert to common. The VC decides which is the better deal. It would be rare for liquidation preferences to be exercised AND then the VC's get to share in the remainder. But I have seen deals initially structured like this but the VC's quickly relented when challenged on this point.

So the value left for the founders/employees may be better than being discussed.
puddnhead_wilson 12/5/2012 | 12:15:25 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.

Your numbers appear to be way off. They have less than 100 people (90-something, I listened to the call last night & that was one of the first questions). I don't know what the burn is, but if they are adding $4-5m ***expenses*** per ***quarter*** to Ciena, as per the article, I'm not sure what math gives $4m ***cash burn*** per ***month***.
Route_495 12/5/2012 | 12:15:26 AM
re: Ciena Nabs WaveSmith >
73,000 per average Joe. Not much. And that goes quickly depending how much higher the liquidation preferences were.
<

tax man cometh... sheesh, i made more off lu stock!
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.
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.

FormerStartupGuy
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.
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.
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 | 12:15:40 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!
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 | 12:15:42 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.
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?
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