by Andrea Orr
[Posted on January 23, 2008 - 5:15 PM]
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DiggInvestors battered the stock price of Ciena Corp. on Wednesday after the telecommunications gear maker the previous night announced its first deal in three years.
In late-day trading shares of the Linthicum, Md., company were down 13.1% to $22.82. Ciena late Tuesday said it would buy privately held World Wide Packets Inc., a Spokane Valley, Wash., seller of Ethernet equipment, in a cash and stock deal valued at about $290 million.
Although some analysts called the price generous, especially for a deal that will create product overlaps, the transaction has one major benefit: placating AT&T Inc., a key Ciena customer. As part of the acquisition, Ciena agreed to provide AT&T with World Wide Packets equipment.
"It was an acquisition that was recommended to Ciena by one of their largest customers, AT&T," said Mark Sue, an analyst with RBC Capital Markets, noting that the San Antonio telecom giant prefers not to do business with small startups. "It helps them, since AT&T is a good existing customer."
With a market capitalization of just under $2 billion and annual revenue of roughly $780 million, Ciena is in an awkward space in the competitive telecom gear market: Too large to be easily acquired, but small enough to struggle winning business away from larger rivals and facing strong pressure to maintain market share.
World Wide Packets recorded sales last year of roughly $30 million and has about 100 customers in the U.S. and overseas. In a research report, UBS analyst Nikos Theodosopoulos said the deal "makes sense strategically, although the valuation appears rich."
Although Merrill Lynch & Co.'s Tai Liani echoed the view that the deal is pricey, the analyst said it could generate more business for Ciena in working with AT&T.
"We believe winning the AT&T contract alone makes the acquisition worthwhile, given its sheer size and the opportunities it opens up for Ciena," Liani wrote.
Investors seemed to need more convincing. Ciena shares touched a 52-week low, selling at less than half their 52-week high of $49.55. Yet in many respects, Ciena's business is strong. Over the past two years it has reversed a net loss and increased revenue from $427.1 million in 2005 to $779.8 million in fiscal 2007.
The company credits much of that growth to a shrewd use of cash to acquire businesses that helped extricate Ciena from the telecom bust that ensued after 2000. Over three years, it spent more than $1 billion to buy five companies, including networking startup Akara Corp. and DSL equipment maker Catena Networks Inc.
But after years of struggling to generate a profit, Ciena's income remains slim, reaching $82.8 million last year, and the challenges competing with larger players are mounting.
