Advanced Fibre Communications

(AFCI)

has found a partner to sharpen its broadband edge.

Shares in the Petaluma, Calif., telecom gearmaker surged 13% Thursday after the company agreed to be acquired by phone-equipment rival

Tellabs

(TLAB)

. The $1.65 billion cash-and-stock deal will create an equipment manufacturer catering to the needs of the nation's big local phone companies such as

Verizon

(VZ) - Get Report

,

SBC

(SBC)

and

BellSouth

(BLS)

.

Analysts say the deal fills a hole for each side. Tellabs is a big supplier of old-line gear for the regional Bells, but it had little by way of new products to continue that success. AFC has compelling broadband access equipment, but it has lacked the scale the Bells require in terms of technical support and installation hand-holding.

"This deal is actually good for everyone," says Telecom Pragmatics analyst Sam Greenholtz. "For Tellabs, for AFC and for the carriers."

AFC has come up big in the Bells' plans to extend fiber-optic networks to customers. This so-called fiber to the premises, or FTTP, strategy has been a big investment theme for AFC in the past year.

The Bells have focused on new ventures such as FTTP and voice over Internet protocol, or VoIP, as their core local phone business suffers a steepening loss of crucial access lines. But Greenholtz says AFC, being a relatively small shop, "was overwhelmed" by all the FTTP activity.

Indeed, some critics bluntly summed up the deal by saying Tellabs was dead in the water and AFC was in over its head.

Under Thursday's agreement, AFC shareholders will get 1.55 Tellabs shares and $7 in cash for each Advanced Fibre share. That ratio initially valued the offer at $21.24 a share, based on yesterday's closing price of Naperville, Ill.-based Tellabs. Tellabs tumbled 13% in early action Thursday, trimming the value of the pact from $1.9 billion at the time of the announcement to $1.65 billion.

Tellabs will control 75% of the new company. The deal is expected to close in the second half of this year and be accretive to 2005 earnings. The combined company will employ about 4,100 people.

"Together, Tellabs and AFC create a strategic global telecom equipment supplier that will lead the industry's shift to broadband data with end-to-end access and transport solutions," Tellabs CEO Krish Prabhu said. "Marrying the leader in access with the leader in transport positions us to grow with our customers in the industry's sweet spot of broadband services. This will enable us to help customers simplify networks, offer easier service provisioning and sharpen their competitive edge."

The deal came as another struggling telecom equipment maker,

Ciena

(CIEN) - Get Report

, sagged anew following its

latest earnings disappointment. The problems at Tellabs and Ciena highlight the difficulty that networking companies have encountered amid the chilly spending environment for their big telco customers. Still, the combination had some observers sounding a hopeful note.

"AFC gets a big vote of confidence joining with Tellabs, and this will help them get more business from the Bells," says Greenholtz.