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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

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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!
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***.
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.
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.
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..
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.
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/
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.
Route_495 12/5/2012 | 12:14:55 AM
re: Ciena Nabs WaveSmith
mmmmmmmmmmmmmmmmmmmmmm.....triple pig......
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.

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