CHICAGO – Optical networking firm Ciena Corp. said Monday it had agreed to acquire ONI Systems Corp for $900 million in stock to bolster its presence in metropolitan optical networking markets.
The deal, expected to close in the second or third quarter, is likely to raise pressure on other telecommunications suppliers to cut their own deals or face increasing competition from larger, stronger players, analysts said. It creates a combined company with about 3,700 employees and annual sales of almost $1.8 billion.
"This could be the first pebble tossed into the pond," CIBC World Markets analyst Rick Schafer said.
ONI Chairman, President and Chief Executive Hugh Martin said the deal made sense because it reduced the risk of lost deals with the larger telephone carrier customers due to his company's smaller size.
"Increasingly customers want an end-to-end solution and developing that on our own would have been a very expensive proposition," he told Reuters in a telephone interview.
Under the deal, each share of ONI common stock will be exchanged for 0.7104 shares of Ciena common stock, leaving ONI shareholders with a stake of about 24 percent in the newly combined company.
ONI, which has seen its stock fall about 86 percent since the start of last year, has a market capitalization of almost $775 million. The bid values ONI shares at about $6.20 a share, a 12-percent premium on Friday's closing price.
TELECOM SPENDING CUTS HAVE HURT
Ciena, hurt by drastic cutbacks in telecom spending, on Feb. 5 said it expected to post a wider-than-expected first-quarter loss, and announced job cuts totaling about 12 percent of its work force.
It said in December it could lose money in the current fiscal year given the cutbacks in customer spending. Ciena is scheduled to report fiscal first-quarter results on Thursday.
The acquisition is expected to "accelerate Ciena's return to profitability," Ciena President and CEO Gary Smith. He told Reuters the deal will not dilute Ciena's earnings in fiscal year 2002 and add to them in 2003.
Suppliers like Ciena have been hit hard by big spending cuts by telephone carriers like Qwest Communications International Inc. and Sprint Corp. , major Ciena customers.
Other networking firms that could be attractive buys include Sycamore Networks Inc. , Sonus Networks Inc. , Corvis Corp. , Germany's Adva AG , Extreme Networks Inc. , Foundry Networks Inc. and Britain's Marconi Plc , analysts said.
Potential buyers include Ciena, Cisco Systems Inc. , Tellabs Inc. , French telecom gear maker Alcatel and Canada's Nortel Networks Corp. , analysts said.
ONI, based in San Jose, California, specializes in optical networking equipment for metro markets, which are expected to experience higher demand than long-distance networks as the economy recovers. Ciena's strength is in the long-distance and switching markets.
Ciena, based in Linthicum, Maryland, said it expects cost savings of $55 million to $65 million annually from the acquisition as well as additional manufacturing efficiencies, and that the combined company would have about $1.3 billion in cash after taking into account $300 million in assumed debt as of January 2002.
EXPECTED COST SAVINGS MAY BE TOO LOW
Lehman Brothers analyst Steve Levy questioned whether the cost savings target was high enough, given the two companies' current money-losing operations.
"This would make a lot more sense to me if they could really ratchet down the expenses," said Levy, who nonetheless said the deal was a good strategic fit.
Smith said a number of areas to save money have been identified, including ONI spending cuts where Ciena already has strong products. Because the deal has not closed, he declined to say whether job cuts or plant closures would be necessary.
Job cuts among the two companies' sales forces and support staff are likely as well as the elimination of manufacturing redundancies, Schafer said.