November 23, 2009
To the surprise of some, Ciena Corp. (NYSE: CIEN) proffered the winning bid during last weekend's auction of the Nortel Networks Ltd. Metro Ethernet Networks (MEN) division, stumping up a package of cash and convertible notes worth $769 million. (See Ciena Beats NSN to Buy Nortel's MEN.)
But where there's a winner there's always a loser. So who falls into which camp?
Ciena – WINNER (sort of)
Ciena is a winner because, well, it beat its opposition, in this case Nokia Networks , to the prize.
In addition, Ciena gets its hands on some neat 40- and 100-Gbit/s technology, a bunch of incumbent customers (especially in North America), and a business with revenues in the $1 billion-plus bracket. During the first nine months of this year, Nortel's MEN division (including associated professional services) generated revenues of $988 million, though that was down 21.3 percent from $1.255 billion in like-for-like sales during the first nine months of 2008.
That gives Ciena greater scale and weight, something that mid-sized vendors need these days to make their customers comfortable about their future (though that didn't help Nortel ...) and to make them more competitive with the big guns in the packet-optical infrastructure market, particularly Alcatel-Lucent (NYSE: ALU) and Huawei Technologies Co. Ltd. (See Gary Smith, CEO, Ci-MEN-a.)
There are plenty, though, who believe the optical, Carrier Ethernet, and access equipment vendor will have its work cut out to make the "winning" tag stick.
First, there's the age-old issue of integration (product line, headcount, and culture) that comes with an acquisition. Few takeovers deliver the positives outlined at the beginning of the process, so Gary Smith and his team at Ciena, who are naturally positive about what they can achieve, can't afford to get caught up in an operational tangle that could harm the business. (See Smith: Why Ciena Wants to Reign Over MEN .)
Then there's the issue of product overlap that's going to cause some initial confusion about what's going to happen to certain long-haul and metro platforms, especially between now and the first quarter of next year, which is when Ciena is hoping to close the acquisition. That overlap led Heavy Reading senior analyst Sterling Perrin to note recently that Ciena, in his view, would be "better off without the Nortel acquisition." (See Ciena/Nortel: Oh Yes, There's Overlap.)
Ciena shareholders – LOSERS
Financial analysts didn't like the look of the Nortel deal in the run-up because of the amount of cash Ciena was prepared to put on the table, and investors have agreed with them today. Ciena's stock is down $1.17 (8.9%) at $12 today.
In a research note issued today, Soleil Securities Group Inc. analyst Michael Genovese, who always had concerns about the proposed deal, noted that the acquisition will result in "huge integration risk... The deal changes Ciena's profile from high margin high growth to lower margin more legacy oriented, and it significantly weakens the balance sheet." He lowered his price target on Ciena to $11 from $17 as a result.
Genovese did also note, though, that the acquisition makes Ciena the third-biggest global optical vendor with about 10 percent market share, and "likely assures Ciena will get Domain status at AT&T Inc. (NYSE: T)." The deal also "brings strong Digital Signal Processing technology for 40G and 100G in-house, and increases Ciena's footprint globally."
Nokia Siemens Networks – LOSER
Second time unlucky for Nokia Siemens, which also lost in the auction for Nortel's CDMA and LTE wireless assets. (See Ericsson Delivers Knockout Blow to NSN and Ericsson: Why We Want Nortel's Wireless.)
The company is keen to boost its presence in the North American market, but ultimately it was outbid by Ciena, just as it was outbid earlier this year by arch rival Ericsson AB (Nasdaq: ERIC).
Now the vendor, which is undergoing a major restructuring, has to go back to the drawing board to figure out its expansion strategy. (See Nokia Siemens Revamps, Cuts Jobs and NSN COO Vanishes Into Finnair.)
Nortel – LOSER
It may seem harsh, but we think Nortel could have sold MEN earlier, for more money, and in an all-cash deal. Getting $769 million for a well-regarded business with revenues above $1 billion doesn't look like a great result for the Canadian vendor.
MEN staff – 88% WINNERS
The good news for about 2,000 MEN staff, about 88 percent of the total, is that they're going to be offered a new job with a company that's not bankrupt. The bad news for the other 12 percent, about 250 to 300 staff, is that they won't be offered a job at Ciena, and current conditions mean they won't get anything from Nortel either.
Ciena's optical rivals – WINNERS (possibly)
Big hitters AlcaLu and Huawei, and even Ericsson and Nokia Siemens, get the chance to at least try to capitalize on the uncertainty that will surround the acquisition and integration process as carriers wait to see what Ciena plans to do with its new assets, and how those fit around its current offerings.
Down the line, however, there's just the chance they'll find Ciena a tougher rival.
— Ray Le Maistre, International News Editor, Light Reading
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