CIENA PURCHASE OF ONI NOT EXACTLY A TRENDSETTER

Widespread consolidation prospects still shaky for overall market

Making a move that likely will be rejected by financial analysts can be painful. But if it means long-term sustainability, the near-term roasting by the market and associated costs may be worth the trouble.

Ciena hopes this will be the case with its purchase of metro dense wave division multiplexing (DWDM) pioneer ONI Systems, a move that will plug a hole in Ciena's long-haul-centric product portfolio and bolster future growth plans. Ciena will pay about $900 million for ONI and assume $300 million in debt.

“Ciena is playing to win — not just survive,” said Ciena President and CEO Gary Smith. “This is a critical step in restoring health to our industry and potentially leading the consolidation.”

And Ciena may not be done, given that Chief Strategy Officer Steve Chaddick has expressed interest in equipment for the network edge.

But a turnaround won't happen overnight. Few companies have the money for large acquisitions, and the odds of Ciena's deal starting a consolidation trend are slim.

ONI's willingness to strike such an agreement reflects the hesitancy of established service providers to put much faith in smaller vendors. Carriers like ONI's technology, but they are trying to reduce the number of vendors they use and are “asking for details on how we will train [technicians] and deploy, support and maintain large network buildouts,” said ONI Chairman, President and CEO Hugh Martin, who initiated the negotiations.

The merged entity will have more resources to support customers. In addition, Ciena expects to gain operational efficiency by combining manufacturing — a tactic that may result in employee cuts after the acquisition is completed in the second or third quarter of this year, when Martin will leave the company.

Despite the synergies, the near-term outlook for Ciena is not bright. The vendor reported a net loss for the first quarter of $56.7 million — 17¢ per diluted share — on revenue of $162.2 million. It also dropped its revenue expectations to $100 million for Q2. Wall Street greeted Ciena's quarterly news and the ONI acquisition coldly, and both companies saw stock prices fall significantly last week.

In addition, the long period before the acquisition closes and the subsequent integration time may be problematic. Both companies have warned current customers of significant changes in product lines, which could spell trouble in the near term, said David Dunphy, principal analyst for Current Analysis. “In 18 months they probably will be thrilled, but over the next quarters, they will get beaten up,” he said.

A long-term problem may be ONI's lack of recent innovation, said Mike Gassewitz, chief operating officer for start-up Meriton Networks, which is building an optical add/drop switch billed as the next evolutionary step from ONI's optical add/drop multiplexer. “We are pleased with the acquisition because it validates our space, but the [ONI equipment] doesn't solve anything other products don't solve,” he said.

Still, Ciena's established name and presence in the long-haul space should meld well with ONI's metro transport equipment. “Ciena paid a significant chunk of money for ONI, but it did make a lot of sense because it filled a major hole in Ciena's portfolio,” Dunphy said.