On Monday Ciena completed the purchase of two closely held networking shops,
. The deals aim to push Ciena
beyond the optical niche it has long inhabited in the communications gear market. Considering the problems cash-burning Ciena has encountered in its core business, the new direction looks like a good bet.
But observers of the Linthicum, Md., company are wondering about the bill Ciena share-holders will foot for those deals. Under the agreements, Ciena issued 100 million shares valued now at around $400 million. If that doesn't seem like an outrageous price, though, consider that the deals will boost the company's shares outstanding by 21%.
The dilution of existing shareholders through massive share issuance is bad enough. But there's another problem: The recipients of the new Ciena shares might be inclined to cash out soon, some observers think. That could create additional pressure on a stock that has declined sharply this year.
Ciena shares have already dropped 36% since the Catena and Internet Photonics deals were announced on Feb. 19. Ciena said the deals would be valued on its books at $637 million, based on the price its shares fetched back then.
Ciena fell 13 cents, or 3%, to $4 in early afternoon trading Monday.
The potential for the stock to be undercut prompted Lehman Brothers analyst Marcus Kupferschmidt, to cut his target price on Ciena to $3.75.
"There is a share lockup for some members of the acquisitions' management, but we estimate 90% of these 100 million shares are freely tradable immediately," Kupferschmidt wrote in a research note. Lehman makes a market in Ciena shares.
A Ciena representative said the percentage of tradable shares is even greater than 90%. But he added that the shareholder costs were clear when the acquisitions were announced in February.
"These steps are important for our expansion into growth markets beyond optical transport," said the Ciena rep. "It allows us to get into markets that enable the creation of new services."
Ciena hopes the Catena acquisition will open a door to further sales opportunities with the Bells. Catena makes what are known as line cards that phone companies use to inexpen-sively upgrade phone connections for digital subscriber line, or DSL, and voice traffic simultaneously. The devices were popular last year among penny-pinching telcos looking to expand capacity on the cheap.
Similarly, the purchase of Internet Photonics is intended to give Ciena a toehold in the cable industry. Internet Photonics makes optical Ethernet transport and switching gear for cable companies and businesses.
But the interests of the venture capital investors who own big private companies like Catena and Internet Photonics may not always align with those of Ciena's shareholders. Typically, acquisitions can be a jumping-off point for venture capitalists, who often view a buyout as the reward for taking early risks in unproven companies.
Catena's largest investors include 32% holder Morgenthaler Ventures and 17% owner Menlo Ventures. London Pacific Life & Annuity owns 13% and Worldview Technology Partners 8%, going by federal filings.
The latest expansion at Ciena comes as no surprise. Indeed, Ciena chief Gary Smith famously vowed to invest rather than cut his way through the industry downturn. The company acquired four tech shops in just the past year in an effort to fill out its product lineup.
But the buying spree has
not always proven fruitful, and recent cuts have been deep. Last week, for example, Ciena said it was
shutting down its ONI facility and fired a quarter of its total staff.