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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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cw.774 12/5/2012 | 3:49:24 PM
re: Did Ciena Overpay for WWP? Sorry not to add much here, but what does WWP have on IPI products anyway? Just different customers I've assumed (IPI CaTV, WWP - Telecom)
paolo.franzoi 12/5/2012 | 3:49:25 PM
re: Did Ciena Overpay for WWP?
I think that you have to look at the price and say to yourself, "How did the Board look at the Fairness Opinion and get there from here?" Remember, without a banker telling the BoD that the price that is being paid is justified by the future look at the business.

This implies that Ciena believes that there is significant and immediate revenue upside to the WWP products. Let's just toss around some numbers.

From a Revenue standpoint, a more normal price might be 3x revenue. This implies a near term revenue stream of around $100M per year.

If I look at it from a conservative, cash basis I need the acquisition to generate $290M of profit within the relatively near future. If it makes $100M per annum at 20% Net Margin, then it takes a real long time to earn back the money I just took out of the bank and paid for the company.

So, did they overpay? Based on existing flows, they surely did. Based on the presumed AT&T business, potentially not. From a revenue standpoint. From a DCF model, this deal is a real dog.

seven
bollocks187 12/5/2012 | 3:49:26 PM
re: Did Ciena Overpay for WWP? Adva executives all appear to wear the same clothes - what gives with that.
Riverhigh 12/5/2012 | 3:49:26 PM
re: Did Ciena Overpay for WWP? Interesting ... Your suggestion sounds like JDSU fronting Mintera in the single digit millions.
bollocks187 12/5/2012 | 3:49:26 PM
re: Did Ciena Overpay for WWP? The prolem with all this is ATT saying they will buy from Ciena and forcing the deal on them.

Ciena should have simply fronted WWP and then built their own at significantly less cost than the $300M.

Just imagine what you can do with $100M in R&D budget to build a product like WWP - so easy.
bollocks187 12/5/2012 | 3:49:26 PM
re: Did Ciena Overpay for WWP? Stan,

If you are right then the Ciena could have bought ADVA for $200M and had a better overall product set and revenue stream than WWP. Also your comment on ANDA profitability come on Stan they are dogs medium long term like WWP they have no real "differentiated product".
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.
stanhubbard 12/5/2012 | 3:49:27 PM
re: Did Ciena Overpay for WWP? ADVA is interesting to consider at this moment. They are a key player in the growing Ethernet access and metro optical markets, they have decent margins for their markets (44% in 3Q07), they have a number of Tier 1 accounts, and 100+ customer have purchased their Ethernet access platforms. Yet their stock has been absolutely hammered over the past year. Market cap has fallen from $515M in December 2006 to $149M today.

Much of their current problem can be traced to a dramatic decline in their WDM OEM sales through the Alcatel-Lucent channel ($24+M in 1Q07 but only $1.4M in 3Q07). They twice lowered 4Q07 guidance--most recently saying that they could be vulnerable to an economic slowdown in the UK.

Folks should keep in mind that ADVA's market capitalization has been slashed in half since their last guidance revision on 21 December.

Bringing it back to the current news, Ciena's acquisition of WWP spells bad news for the good folks at ADVA because Ciena is now one of the muscle players in the Ethernet over fiber access space.

When queried in November 2007 about a second carrier Ethernet access platform (CEAP) vendor at BT, ADVA CEO Protiva highlighted that his company is the primary supplier. He was dismissive of competitors like Ciena-OEM partner ANDA, which BT announced as its 2nd CEAP vendor for 21CN. Protiva noted that ADVAG«÷s CEAP competitors are smaller than ADVA with G«£less resources and less focus.G«•

That's not necessarily the case now. ANDA--which recently turned profitable--appears well-focused on its opportunities. And resource-rich Ciena appears determined to pump fuel into the WWP rocket and send the baby into orbit.
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.
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