Ciena's Trunk Filled With Nortel Junk

NEW YORK (TheStreet) -- How much is a dying networking business worth? About half a billion, says Ciena (CIEN Quote).

In a bold bid to double its size to better compete with rivals like Ericsson (ERIC Quote) and Nokia (NOK Quote) Siemens (SE Quote), communications equipment specialist Ciena has agreed to pay $521 million in cash and stock for the optical and Ethernet divisions of failed tech giant Nortel.

To defend its turf, Ciena faced a difficult decision to either gain scale or defend its smaller niche business from increasingly larger foes. In effect, Ciena was forced to buy the Nortel businesses, if for no other reason than to keep it out of the hands of Ericsson, which is becoming a dominant force in telco equipment supplies. Ciena says it has been considering the move for a year.

When Nortel put its various businesses up for sale last year as it prepared for bankruptcy, the early bids for the Ethernet business were reported to be about $1 billion. Ciena has been evaluating the purchase for a year, and given the price of the deal, clearly benefited by the passage of time and the lack of enthusiastic interest from other potential acquirers.

Investors haven't exactly been supportive of the move.

Ciena shares have fallen 16% in the past week on concerns that a big acquisition would dramatically batter the company's books. Ciena had been reported to have bid $550 million by Bloomberg Tuesday, sending the shares down 8% for the day. The announcement of the deal helped ease some concerns as Ciena's stock rose 1% in premarket trading Wednesday.