Why Ciena acquired Worldwide Packets

Ciena’s surprise announcement of its plans to acquire Ethernet access vendor Worldwide Packets left some analysts scratching their heads yesterday, largely because Ciena declined to offer many details on key justifications for the deal and its terms.

In particular, analysts puzzled over the purchase price -- $200 million in cash, $15 million in assumed debt and 3.4 million shares of Ciena stock, which, at Tuesday’s closing price of $26 per share, comes to roughly $304 million. That’s slightly more than ten times the revenue WWP earned last year. Analysts argued that the benefits of some of Ciena’s earlier acquisitions, announced with similar optimism, didn’t always become clear in the long run.

Ciena CEO Gary Smith argued that those past acquisitions have been great contributors of technology, if nothing else. And the WWP acquisition, he said, strengthens Ciena’s market share and presence (both within AT&T, where it diversifies Ciena’s relationship with one of its largest customers, and elsewhere) and expands its carrier Ethernet expertise. Ciena expects WWP to be “accretive” (i.e., a contributor to earnings) within a year of the deal closing, which it expects to occur sometime before May.

WWP’s revenue is expected to ramp this year, Ciena said, though they won’t say how much. But as Morgan Keegan analyst Simon Leopold pointed out in a research note today, “If we assume [WWP’s] sales double in 2008, [the purchase price] is still expensive.” And it comes at a time when valuations across the industry are notoriously low. One analyst on Wednesday’s call remarked that Ciena could have acquired “two Advas” (meaning Adva Optical Networking, which competes in the same space) for the same price.

Further complicating the matter is Ciena’s vow to continue to honor WWP’s partnership with Alcatel-Lucent, Ericsson and Tellabs -- all competitors of Ciena’s.

One of the factors Ciena considered in putting a price on WWP is its recent selection by AT&T for what Ciena calls a “significant” multi-year deployment. Ciena offered scant details on the deal, and AT&T hasn’t yet answered questions on the subject. The deal is somewhat surprising, since WWP is known for offering active Ethernet architectures, and AT&T’s fiber-to-the-premises deployments have been exclusively passive architectures. Although WWP’s gear has been deployed in several residential FTTP applications (like this one), AT&T will deploy WWP’s gear to deliver Ethernet services to businesses, Ciena said, adding that the deal also includes backhaul opportunities.

(continued on next page)