Ciena to buy Nortel unit in $769 million deal

Ciena says the acquisition of Nortel's Metro Ethernet Networks will help it build a bigger global reach.
Ciena says the acquisition of Nortel's Metro Ethernet Networks will help it build a bigger global reach. (Nancy Andrews/the Washington Post)
Buy Photo
By Mike Musgrove
Washington Post Staff Writer
Tuesday, November 24, 2009

Linthicum-based Ciena announced Monday that it has won a bid to buy a major piece of bankrupt Canadian tech firm Nortel Networks.

In an offer worth $769 million, Ciena says the acquisition of a Nortel unit that makes gear for large telecommunications networks will help it build a bigger global reach. The Maryland company offered $530 million, plus $239 million in convertible notes, or loans, under the terms of the deal.

While not a household name, Ciena's products make up part of the Internet's backbone. Its customers include telecommunications giants such as AT&T and Verizon. Nortel, a former tech powerhouse, filed for bankruptcy protection in January after sales fell sharply during the economic downtown.

Ciena President and chief executive Gary Smith said the acquisition will put his firm ahead of its previous expansion schedule by two or three years.

"This is a fragmented industry that is consolidating," he said, and the acquisition "makes a lot of sense to the customers who want to deal with bigger players and clear leaders."

The acquisition of Nortel's Metro Ethernet Networks business will move Ciena from ninth or 10th place in its market to third place, said Brent Bracelin, an analyst with Pacific Crest. France's Alcatel-Lucent and China's Huawei remain larger.

An earlier version of the Ciena bid, offered in October, was worth a total of $521 million, but the firm increased its offer by 50 percent in order to beat out Nokia Siemens Networks, a larger competitor.

While Ciena's stock has roughly doubled this year, share prices were slightly down after the deal's announcement; shares opened at $12.27 and closed down 8.9 percent, to $12, on Monday.

The decline in the stock price probably was a reaction to the purchase price, Bracelin said. "Some investors think that's a hefty amount," he said.

Ciena employs about 2,300 people around the world and will take on about 2,000 former Nortel employees as part of the deal. Melding the two companies could be difficult, some analysts said.

"From a strategic perspective, I think Ciena is doing the right thing," said Ping Zhao, a senior analyst with the research firm CreditSights. "But the integration of two companies, especially two of similar size, is always tricky."

Another analyst agreed. Jennifer Pigg, with research firm Yankee Group, said that "Ciena has a good name in the market, as does Nortel, and I expect the products they come out with will be very good."

However, she said, "they'll be participating in a three-legged race against competitors who aren't encumbered that way."

Ciena expects to incur costs of approximately $180 million as it incorporates Nortel's assets.

"It's an expensive integration, but we want to make sure we do it right," Adams said. He noted that he expects the deal to begin making money for the company "as we get to 2011."

© 2009 The Washington Post Company