Tellabs' new deal

Tellabs' announcement of a revised merger agreement with Advanced Fibre Communications was no great surprise to anyone who has been following the story since AFC's last quarterly earnings call. But the details of the merger amendment shed some much-needed light on the situation.

Even though the revised deal looks more advantageous to Tellabs, some analysts are "scratching their heads" over why Tellabs would use more of its cash to buy what is essentially "a start-up business," one analyst said on today's teleconference. Tellabs CEO Krish Prabhu argued that the company's copious cash wasn't doing it any good sitting around earning 2% interest. And he told the analyst to think of the value of AFC in three prongs: its cash on hand, its recurring revenue and the opportunity to play in the fiber-to-the-premises sector--what Prabhu called "a strategic business."

Analysts also wanted to know the odds of the deal changing yet again. Some perhaps recalled Tellabs' failed merger with Ciena in 1998. Similarly in that case, trouble with a major carrier customer (AT&T) caused Tellabs to review the terms of the deal at the end of the summer, and the deal died in an autumn shareholder vote. For the AFC deal, however, Tellabs no longer needs the approval of its shareholders. Prabhu today worked to assure analysts that, "After having worked on this deal for more than 18 months, the last thing we want is for the deal not to go through." However, he also said, "We certainly believe, if there's a significant material adverse change, the deal could be off, but outside that, both sides agree we should move quickly so we can get on the train."

Exactly what constitutes a material adverse change (or, for that matter, the "significant material adverse change" Prabhu cited) is unclear. "When you look at what is a MAC and talk to people who think they know what it is, you get several different answers," Prabhu said.

And as the companies are now pushing the expected close date back to the end of the year, it seems more like they've decided to catch that "train" at the next stop.

E-mail me at egubbins@primediabusiness.com.