Ethernet equipment

Did Ciena Overpay for WWP?

Analysts dogged Ciena Corp. (NYSE: CIEN) chief executive Gary Smith yesterday about the $305 million his company is paying for World Wide Packets Inc. , seeking details on how the price got so high.

That's the value of the cash and stock deal, if you include $15 million in WWP debt that Ciena would pick up. Ciena announced the deal yesterday after the market closed. (See Ciena Takes Out World Wide Packets and Ciena Buys WWP.)

The acquisition even comes with a built-in customer: AT&T Inc. (NYSE: T) has agreed to a multi-year deal to buy WWP gear from Ciena, starting after the acquisition closes. AT&T plans to use the equipment for business Ethernet and wireless backhaul, said Steve Alexander, Ciena's chief technology officer, during yesterday's conference call with analysts.

The catch is that Ciena also said privately-held WWP had $30 million in sales for the past year, meaning the purchase price is roughly 10 times trailing revenues.

That didn't sit well with some analysts. Why so much? Was it the promise of big future revenues from the AT&T deal? Did Ciena have to compete with an aggressive bidder?

"You paid 10 times trading sales for a money-losing private company and you won't tell us whether there was a competitive bidding process or not? Why is that?" analyst Samuel Wilson of JMP Securities asked Smith during the call.

Smith wouldn't give additional details, though, and towards the end of the call, he sounded a bit exasperated about it.

"The important thing is that we think this is a good asset, we think we paid a fair price for it, we thought very carefully around the mix of cash versus shares, and the largest carrier in the world [AT&T] has validated its technology. So, I think there are some very positive indicators as to why this is a fair price," Smith said.

Analysts also seemed unhappy that Ciena wouldn't forecast WWP's revenues. Ciena officials did say the deal will drag 2008 earnings per share down by "mid-single digits, on a percentage basis," from the First Call consensus of $1.62. The deal will become accretive during the first half of Ciena's fiscal 2009, meaning the six-month period ending April 2009.

Further clouding the picture are WWP's OEM agreements with Alcatel-Lucent (NYSE: ALU) and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA). Smith wouldn't specify what portion of WWP's $30 million revenues were from those resellers. Asked if WWP's OEM revenues would be lost for Ciena, he said, "It's too early to tell."

Price aside, the deal appears to have good tactical value, as it fleshes out Ciena's carrier Ethernet portfolio.

"Ciena will now have next-generation products across all of the hottest Ethernet-related markets," Heavy Reading analyst Stan Hubbard writes in an email to Light Reading. The WWP buy would bring Ciena some Ethernet-over-fiber and Ethernet switch/router products. Ciena has Ethernet-over-TDM covered through the CN 3000, which is an OEM product produced by ANDA Networks Inc. , and it's doing packet optical transport with the CN 4200.

WWP would also strengthen Ciena's story behind Provider Backbone Transport (PBT, or PBB-TE), the Ethernet technology embraced by BT Group plc (NYSE: BT; London: BTA) for the 21CN project. (See WWP Combines MPLS, PBT.)

It's a busy time for carrier Ethernet deals. Ciena was rumored to be chasing after ANDA too, but apparently got spurned, as ANDA filed last month to go public. (See ANDA Files for $86M IPO.)

And earlier this month, Nokia Networks completed its acquisition of metro Ethernet specialist Atrica Inc. . (See Nokia Siemens to Acquire Atrica and NSN Completes Atrica Buy.)

Ciena shares were down $1.17 (4.5%) at $25.00 in after hours trading.

— Craig Matsumoto, West Coast Editor, Light Reading

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Pete Baldwin 12/5/2012 | 3:49:32 PM
re: Did Ciena Overpay for WWP? I wonder if Ciena's acquisition history adds to the suspicion over the 10x price. It's been spotty, you have to admit. Tim Daubenspeck brought up WaveSmith during the call, and those of us who were around will always remember Cyras...

In a research note today, George Notter at Jeffries wonders aloud if AT&T picked WWP for its RFP, then bullied Ciena into buying WWP. That might help explain the price -- but also would reflect how much power the carriers have vs. the equipment vendors. Not a good sign, if it's true.
materialgirl 12/5/2012 | 3:49:32 PM
re: Did Ciena Overpay for WWP? If CIEN only had Ethernet over TDM, they needed something new anyway. Since Etherent seems to be relatively independent of the physical layer, however, one has to wonder if they could not have adjusted their 3000 to cover more media types for less than $100M. That is, if any of the engineers are left.

As to customer control, some control is a good thing, since they eventually pay the bills. Forcing suppliers into stupid deals is, however, a nightmare.
stanhubbard 12/5/2012 | 3:49:31 PM
re: Did Ciena Overpay for WWP? I was disappointed by many of the questions coming from the financial analysts during the Q&A period on the Ciena conference call. Queries by analysts indicated significant confusion about opportunities for revenue growth in the fast moving Ethernet access and switch/router markets, a lack of understanding about Ciena's expanding Ethernet portfolio, applications served by WWP's platforms and ANDA's platforms, and an almost myopic focus on the big AT&T news.

I'm not at liberty to debate the financial metrics, but from a competitive point of view this is a smart move. If I was an analyst or investor, I would go back and listen with greater confidence to what CEO Gary Smith and CTO Steve Alexander said in the conference call.

Ciena has been living and breathing Ethernet over the past three years, and this commitment is helping the company make better decisions. One of the financial analysts on the call yesterday dinged Ciena for the Internet Photonics acquisition. Oddly enough, it was only after closing the IPI deal in May 2004 that Ciena began to focus more intently on Ethernet.

Ciena will now have next-generation products across most of the hot Ethernet-related markets, including: Ethernet over fiber (WWP), Ethernet demarcation and Ethernet over TDM access/aggregation (ANDA), Ethernet switch/routers (WWP), and packet optical transport (CN 4200). It has a strong portfolio to address the rapidly growing business Ethernet services market and the hot mobile backhaul market too.

Several analysts appeared to be singularly focused on interpreting the AT&T win in the worst possible light. The fact is that Ciena/WWP faced tough competition and won business with the world's largest operator. AT&T is strategically committed to transitioning customers from legacy data services to Ethernet and is going to be using the WWP platforms to add new Ethernet endpoints to its network.

One more thought. I would encourage Wall Street not to just focus on the AT&T news. That's great, but having WWP should help Ciena generate good revenue from other major customers and address more applications than just enterprise services.

OSXman 12/5/2012 | 3:49:31 PM
re: Did Ciena Overpay for WWP? The price of these acquisitions is somewhat dictated by the market, and right now the market is saying that many of these companies are worth next to nothing. ADVA sells for just $150mm in market capitalization. They are the recognized leader in EAD AND they have another $200-250mm from other divisions.

It was an expensive, financially questionable acquisition that may (probably) have been strategically smart.
OSXman 12/5/2012 | 3:49:31 PM
re: Did Ciena Overpay for WWP? The price of these acquisitions is somewhat dictated by the market, and right now the market is saying that many of these companies are worth next to nothing. ADVA sells for just $150mm in market capitalization. They are the recognized leader in EAD AND they have another $200-250mm from other divisions.

It was an expensive, financially questionable acquisition that may (probably) have been strategically smart.
douggreen 12/5/2012 | 3:49:29 PM
re: Did Ciena Overpay for WWP? I seldom offer opinions nowdays, but this is too juicy to pass up.

First, Stan: Wall Street is supposed to focus on how the aquisitions will increase profitability, not just on how "strategic" the deal is. It is the stockholders money that they are spending, and they care about how this will increase their stock price. Ciena has to be prepared to answer these sorts of questions. From an IR perspective, it's like trying to tell your customer what they should care about. But then again, IMO they have always sucked when it comes to the marketing side of PR and IR, focusing too much on glitz and branding and not enough on a clear, simple, and convincing arguement.

Second, on the face of it, there is no way that Ciena should have paid anything near $300M for this company on the face of it. Their valuation as a public company wouldn't be near that much, and an aquisition usually comes at a discount from an IPO value. There is either something very unusual going on or Ciena are the worst negotiators in history (which I don't think is the case).

Third, Ciena has made a lot of aquisition mistakes in the past, but some of those "strategic" purchases that had no value to customers were driven by people who are no longer there. The current management team at Ciena are very pragmatic. This leads me to the logical conclusion that there are some unknown factors that somehow put power into the hands of WWP when it came to setting the purchase price. Ciena needed it badly, and WWP had other options.

I have NO inside information, but I can immagine several scenarios. On the demand side for Ciena, there could be a significant drag of WWP products on other Ciena products (selling WWP swithing gear and transport as a package for large customers, for example). On the WWP side, with several OEMs there is no way that they could not generate at least a small bidding war unless they are complete negotiating morons.

So, for me, they paid too much and they know it, but for some legitimate reason they felt they had to, and WWP had a lot of leverage on the deal.

Finally... for Wall Street pukes... were there other bidders? What a stupid question. Of course there were, and of course Ciena is not going to comment on it. If you want to know, go ask a contact at the investment bank that represented WWP. I'm sure they would be happy to brag (off the record) about how THEY put together the competition to drive the valuation. A good analyst would have known who to call as soon as the announcement hit the street.
Off_the_shelf 12/5/2012 | 3:49:28 PM
re: Did Ciena Overpay for WWP? Stan,

I don't think anyone will disagree with the strategic value of this deal to Ciena, but Smith still has to justify the price to Wall Street (investors); that's part of his job!

From the outside looking in, he is still "rubbing his a#$" on this deal and can't admit that it hurt so bad. He has to justify the price or take the abuse that comes with the virtual "it's a good deal because I said so."
OSXman 12/5/2012 | 3:49:28 PM
re: Did Ciena Overpay for WWP? Let's look at it from a different perspective. Would anyone care to comment on the potential value of ADVA. They are the lead vendor at BT 21CN and have by far the market share lead in Ethernet access devices. They are technologically differentiated with their solution and, at least according to ADVA are well ahead of the competition. They cite as evidence that it took so long for BT to even name a second vendor for 21CN. (Of coruse, on the other hand, I hear there are some technological "issues" with ADVA at 21CN.)

Either way, ADVA will do E250mm in revenues this eyar with a current market cap of E100mm. They have been and will be substantially profitable but are going through a bit of a rough patch at the moment. It just makes the WWP price look ludicrous.
bollocks187 12/5/2012 | 3:49:28 PM
re: Did Ciena Overpay for WWP? Stan,

Most people in the industry feel that WWP was in a difficult position. The company has been around for a very long time as a startup and has not made significant revenue to justify the price paid by Ciena.

Riverhigh 12/5/2012 | 3:49:27 PM
re: Did Ciena Overpay for WWP? First mover advantage, $3.9 billion market by 2010, established technology, large customer win (very competitive RFP), new WWP product portfolio on the way, traction of WWP products in other telecom carriers .... all unknown variables and hard to factor into the purchase price. I think the 10 times revenue is spooking the market and analysts alike. As alluded in the conference call, on numerous occasions, the purchase price does not reflect the current run rate (significantly greater) but instead the 2007 revenues. Once the "significant greater" is known one can get a better idea how much they really paid.
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