Ciena may lose its name and keep a bit of dazzle After 'joining forces' with Tellabs, firm sees more Md. growth


The pending sale of Ciena Corp. of Linthicum to Tellabs Inc. should preserve the Maryland company's role as a leading player in the increasingly competitive telecommunications equipment industry.

It also would represent the end of a brilliant 18 months in which Ciena's dazzling growth became a symbol of Maryland's new, technology-driven economy.

The companies announced the $6.9 billion deal yesterday, although rumors about it had begun circulating Tuesday.

The merger would marry Tellabs' network switches and marketing muscle with Ciena's state-of-the-art devices that greatly expand the capacity of phone networks. Demand for Ciena's devices has boomed as Internet and computer data have flooded the nation's phone lines.

Ciena's meteoric rise was unforeseen by its founder, David Huber, a Texas engineer who thought he could sell his invention, equipment that allows more information to be transmitted over optical cables, to cable television companies.

What he hadn't envisioned was the startling growth of the Internet.

After being founded in late 1992, Ciena spent four years developing the technology so it could get it to market. First-year sales, in 1996, of $194.3 million set a record for a start-up company as telephone companies seized on the Ciena innovation to ease the traffic jams on their networks.

And, when it went public in February 1997, Ciena became the most valued new public company ever, as its market value leaped to $2.3 billion by the end of its first day of trading and made the top company officials overnight millionaires.

In its last fiscal year, Ciena had $373.8 million in sales, a nearly sevenfold jump over the pervious year.

The Nettles arrival

Critical to Ciena's success was bringing in Patrick H. Nettles, a former Silicon valley software company executive with a technical background, as chief executive officer in February 1994.

"Nettles was one of the few people who understood the opportunities and suggested [the transmission equipment] be applied to the telecom world," said Bill Magill, a senior analyst with Nationsbank Montgomery Securities in San Francisco.

Nettles also oversaw the move of the company from Texas to Maryland in 1994. Although the combined company will assume the Tellabs name and be based at Tellabs' headquarters in the Chicago suburb of Lisle, Ill., officials said yesterday that Ciena's operations would continue to grow in Maryland, where it has been adding employees at a torrid rate. The company has about 1,300 employees -- 1,000 of whom are at the company's Linthicum headquarters and Savage manufacturing plant.

Broader operations expected

"Our manufacturing capabilities here will become the basis for broader operations," said Nettles, who is to become Tellabs' president and chief operating officer, with his primary office in Maryland. "We're clearly joining forces." That was echoed by Tellabs' president and chief executive officer, Michael J. Birck, who said the merger would benefit the employees of both companies.

"A company that has a broader base in the industry has more sustainability," said Brick, who now is to be Tellabs' chairman and CEO.

Tellabs, which was founded in 1975 and has approximately 4,200 employees worldwide, reported $1.2 billion in sales for its last fiscal year.

The planned merger marks the second time in just over a month that a young, highly successful Maryland technology firm has been bought by an out-of-state company. On April 27, Landover network equipment firm Yurie Systems Inc. announced that it was being acquired by Lucent Technologies Inc., one of Ciena's major competitors, for about $1 billion.

Deal meets with applause

Analysts applauded yesterday's announcement, saying the Tellabs-Ciena deal fits a number of trends that are helping to reshape the telecommunications industry.

One is merger mania. Ciena and Tellabs joined forces in part because other companies are doing the same thing in an industry that increasingly prizes bigness. To survive in the highly competitive and capital-intensive communications world, companies are trying to offer as many services as they can.

Robert Wilkes, an analyst with Brown Brothers Harriman & Co. in New York, said that, while phone companies used "to buy a lot of [network services] from different vendors and cobble them together," they prefer to get multiple services from the same company.

Other recent deals

Thus, communications equipment giants such as Lucent and Cisco Systems Inc. have been aggressive about acquiring smaller companies to expand their offerings.

Ciena bought Terabit Technology Inc. of Santa Barbara, Calif., for $11.7 million in April, while Tellabs agreed in February to acquire Ashburn, Va.-based equipment manufacturer Coherent Communications System Corp. in an $800 million deal.

Ciena also gives Tellabs a beachhead in the market for white-hot optical networks, fiber-optic lines that send information as pulses of light. While Ciena's equipment is based on optical technology, Tellabs' services use traditional electronic signals.

Birck said his company began trying to build up its optical capability more than a year ago, but decided that acquisition was the best way to gain the expertise.

"A [telecommunications] company that aspires to be a major participant in the 21st century must have as its basis an optical networking capability," he said. "Tellabs' belief was that we weren't getting there quickly enough."

"It's a deal that makes a fair amount of sense," said Brown Brothers' Wilkes. "There is a move to optical networking and both companies harbor ambitions in that regard. Ciena is already there, and Tellabs is moving in that direction."

For its part, Ciena will obviously gain a big chunk of money from the merger, but it also stands to benefit from Tellabs' experience and marketing strength.

James E. Jungjohann, an analyst with CIBC Oppenheimer Corp. in New York who called the merger "an excellent match," said pairing with Tellabs will give Ciena an edge in marketing its products to the Bell companies, which dominate the nation's local phone networks.

"Ciena was at a stage in their game where they wanted to sell to Bell operating companies. To do that, you have to jump through lots of hoops. Tellabs has had experience jumping through those hoops for many years."

Tellabs' strong international presence also could complement Ciena's own expanding foothold abroad; in April, Ciena announced the opening of a sales and technical center in England and the signing of a service contract with a Belgian networking firm.

There had been rumors that other companies might make a play for Ciena, notably Cisco, which in April formed a marketing and equipment alliance with Ciena.

Nettles insisted yesterday that Tellabs faced no competing bid for Ciena. He said Ciena's close bond with Cisco would not be abandoned because of the Tellabs merger, calling Ciena's partnerships with Cisco and Tellabs "complementary undertakings."

Ciena, Tellabs at a glance

.................... Ciena Corp. .......... Tellabs Inc.

Headquarters ....... Linthicum ............ Lisle, Ill.

Top officials ...... Patrick H. Nettles ... Michael J. Birck

.................... President, CEO ....... President, CEO

Employees .......... 1,300 ................ 4,200

FY '97 revenue ..... $373.83 million ...... $1.204 billion

FY '97 profit ...... $112.94 million ...... $263.69 million

Yesterday's ........ $61.75 ............... $63.8125

stock close ........ +$4.1875 ............. -$2.0625

52-week high ....... $63.75 ............... $73.375

.................... Yesterday ............ on April 22

52-week low ........ $37.25 ............... $42.625

.................... on Feb. 24 ........... on Oct. 28

Pub Date: 6/04/98

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