Did Ciena Overpay for WWP?
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