CIENA CORP., a Linthicum telecommunications equipment company, announced last week that it is buying two small firms, Lightera Networks Inc. and Omnia Communications Inc., in separate stock deals initially valued at a combined $981 million.
Ciena is only beginning to recover from a streak of severe financial setbacks, and was itself rumored to be a takeover target.
How risky is Ciena's purchase of Lightera and Omnia? What does Ciena stand to gain from owning these young, untried companies?
Analyst, Argus Research Corp., New York
The potential downside is that these companies are start-ups, so they don't have revenue, they don't have earnings. They don't even have products ready yet, and there will be some time before the products are ready. They've got to work well, they've got to work with Ciena products and be accepted by customers.
You're paying a fairly high acquisition price and also diluting your own earnings. You also have to worry about integration issues.
The upside is, No. 1, it shows Ciena is very much alive and that they have people that think highly of them, that want to work with them and partner with them.
Two, it makes their key products a lot more useful to key customers because, when you combine everything together and put it in a package, that's a much more complete solution. All the pieces that are being acquired are quite complementary. In my view, this was a well thought-out acquisition because they knew what pieces they needed and they went after them.
Analyst, First Albany Corp., New York
I think there's definitely a risk factor, buying two start-up companies and paying a big price. Things have to work perfectly, because the field they're getting into is extremely competitive. You're looking at Lucent and Nortel and Pirelli and the whole crowd.
The company's making a big sacrifice here. They were supposed to make 26 cents [in earnings per share] this year. Now with these two transactions that could go to zero, a break-even, without one-time merger charges.
On the upside, if all these things pan out as expected, it places them dead center in one of the hottest areas of telecommunications, which is optical networks. It establishes them as a prominent player. It's one of those high-risk, high-reward strategies. If these things pan out as they expect, they would be a viable competitor.
Analyst, Standard & Poor's, New York
There's definitely some risk here -- you're dealing with companies that have no revenue. You risk way overpaying and getting no revenue in return. There's always the chance the revenue doesn't materialize, or doesn't materialize as much as Ciena wants it to.
Then there's the risk with integrating the companies and integrating the sales forces. That's always a risk with technology companies because the sales forces are familiar only with their own products and it takes some time to bring sales forces up to speed.
The technologies that they're acquiring from these companies are in areas where Ciena wasn't really before. It's basically to expand the size of [Ciena's] market.
Michael S. Davies
Analyst, Punk, Ziegel & Co., New York
My feeling is that it strengthens Ciena. I think strategically this deal made a lot of sense for them.
I went out to visit these companies, and both of them are forerunners in delivering next-generation optical platforms. If we look at digital [technology] being the first great revolution in telecom, optical is the second and Ciena is in a position to deliver if things go as they plan.
The advantage for Ciena is, one, it expands their market opportunity. Two, there are production synergies that can be leveraged.
Another factor is that Ciena now provides a more complete solution from the core of the network all the way to the subscriber, so it's more of an end-to-end solution.