Will WaveSmith Execs Stick Around?

A few days after Ciena Corp. (Nasdaq: CIEN) announced its plans to buy the multiservice switch startup WaveSmith Networks Inc., speculation abounds about the future role of WaveSmith management (see Ciena Nabs WaveSmith). Initially, it looks as if they're on the way out the door.

Specifically, Tom Burkardt, chairman, president, and CEO of WaveSmith; and John Burnham, vice president of marketing, are expected to be leaving after the acquisition is completed in the third quarter. But they won’t be going empty handed. According to several sources, these savvy execs negotiated accelerated stock vesting provisions in their contracts.

“I’m sure they have a pretty good parachute,” says Sam Greenholtz, an analyst with Communications Industry Researchers Inc. “I don’t know if I’d call it golden, but it certainly has a lot of glitter.”

Sources close to the company say Burkardt is expected to walk away with about $3 million worth of Ciena stock. Burnham is likely to be getting about $1 million. Not a bad deal considering that Burkardt has only been with the company since last November and Burnham’s only been there since January (see WaveSmith Gets New CEO and WaveSmith Overhaul Ousts Founders).

Curiously enough, Ciena officials have said very little about Burkardt and Burnham's role at the company in public statements over the last two days.

Historically, Ciena hasn't kept many employees from companies it has acquired. For example, after it announced the acquisition of Cyras back in December of 2000, the company may have cancelled the accelerated vesting clause that the Cyras CEO and others had in their employment contracts (see Ciena To Buy Cyras for $2.6 Billion and Ciena Grinches Cyras Execs ). But eight months later, most of them were gone anyway. During a quarterly conference call, the company announced that Alnoor Shivji, one of Cyras’s founders and CEO of the company at the time the acquisition, had left (see Ciena's Day of Reckoning). Several others had left with him.

By the time the ONI Systems acquisition was announced in February 2001, both companies made little effort to conceal the fact that Hugh Martin, ONI’s CEO would not have a role in the newly merged entity (see Ciena and ONI: Wedding of the Year?). Ciena also ended up cutting roughly 110 ONI staffers as it tried to reduce its headcount and expenses (see Ciena to Merge, Shrink).

“It makes sense that these guys wouldn’t want to stick around,” says Greenholtz. “Burkardt is president and CEO and then he’s going to be a VP -- of a division? When you look at the corporate structure, that’s a pretty big drop. It’s more like a demotion.”

But it's also possible that the WaveSmith acquisition will be seen differently. For one, unlike Cyras, the product already has customers. And unlike ONI Systems, there are RBOC customers involved. As a strategic bet on the future of multiservice switching, Ciena may be willing to give the company more resources and keep the bulk of its employees.

Neither WaveSmith nor Ciena would comment on the speculation. Denny Bilter, a spokesman for Ciena, says that many of the organizational decisions are still being worked out. He confirmed that the WaveSmith facility in Acton, Mass., will likely remain open, and he added that the company expects to keep most of the 98 employees on staff at WaveSmith.

“At first blush, there doesn’t seem to be a lot of redundancy between the teams,” he says. “What they are doing is very different. But at this point, those decisions haven’t been made.”

While it sounds as if most of the WaveSmith employees will get to keep their jobs, it’s fair to say that they won’t be making out as well as Burkardt and Burnham. During the last round of funding, which was announced in October 2002, employee shares were diluted drastically, say sources close to the company. One former employee contends that WaveSmith still has about 200 million shares outstanding.

In Ciena's conference call on Wednesday, Ciena officials said that WaveSmith's valuation in its third round of invesment, the one in which Ciena participated, had been roughly $86 million. If prior rounds had been valued in the hundreds of millions, employee shares were likely substantially diluted.

But many in the industry say that regardless of the dilution, this is likely the best outcome for the WaveSmith employees. Countless startups in similar situations have simply gone out of business, leaving shareholders with no tangible value.

WaveSmith may also have gotten a better price from Ciena than if it had waited until the option-to-buy clause kicked in later this year. Apparently, when Ciena invested in the company’s third round of funding, it negotiated a provision that would have allowed Ciena to buy WaveSmith for $150 million in June 2003, says one former employee.

So why did Ciena accelerate the purchase date and increase the purchase value when it had already locked in a lower price? You might want to chalk it up to savvy negotiating by the WaveSmith team. When Burkardt came on board, he began lobbying Ciena for the purchase. He claimed that without a purchase or more money from investors, the company wouldn’t have enough to keep going, says the former employee. The deal with SBC Communications Inc. (NYSE: SBC) and a possible win with Verizon Communications Inc. (NYSE: VZ) likely helped in Ciena’s decision-making process, as well (see WaveSmith Wins at SBC).

As for the acquisition itself, analysts are seeing it as a positive move for Ciena.

“We believe that Ciena needs to diversify from its position as a pure play in optical systems in order to improve its opportunities for revenue growth,” says Simon Leopold, an analyst for Merrill Lynch & Co. Inc., in an investor research note published this morning. “Data networking products, such as WaveSmith's, fit the bill because it is a better end market than optical systems, while still leveraging similar customers and sales channels to Ciena's current base.”

But he cautions that because WaveSmith is still in the early stages of its lifecycle, Ciena will have to pour a significant amount of capital into the new division. Ciena has publicly stated that it expects operating expenses to increase $4 million to $5 million per quarter throughout the rest of this year. And Ciena already has a large expense line on its balance sheet, he notes.

“We therefore think that, while this deal is definitely in the right direction, it is near-term neutral, given that it will not help Ciena to improve its breakeven point."

— Marguerite Reardon, Senior Editor, Light Reading

whyiswhy 12/5/2012 | 12:14:20 AM
re: Will WaveSmith Execs Stick Around? ...and hope the SEC and/or process servers do not find them. This has all the earmarks of an inside deal cooked up to screw the former founders and executives.

Failure to protect minority rights, malfeasance, insider trading, conspiracy, etc.

Not a good time to look for trouble and lawsuits, with all the lawyers running around hungry these days.

But what do I know? This is JMHO based on pure speculation.

Metal 12/5/2012 | 12:14:13 AM
re: Will WaveSmith Execs Stick Around? Seems to me that the founders and former executive team will be taken care of as well. Dalias is still on the BOD and most of the other execs who departed were taken care of so as to avoid back-stabbing, rumors, etc.

A few employees who I keep in touch with consider the deal about the best case scenario given the times. No one is going to become a millionaire (save the top execs) but if Ciena does well, Wavesmith employees should do very nicely....

whyiswhy 12/5/2012 | 12:13:57 AM
re: Will WaveSmith Execs Stick Around? Yea, agree the curreent employees had to get something to stay around. Rather strongly suspect the former execs got screwed, but hey, they are not needed as far as Ciena is concerned. So the net net out of pocket here after taking into account the 3:1 exchange (probably) Ciena got in the last round is more like $15-$20M.

Not bad PR though.


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