Ciena Grabs for Growth, but Some See Overreach

The optical networker expands beyond its original focus as it keeps on spending.
Author:
Publish date:

Refusing to be cowed by the tech bust, Ciena (CIEN) - Get Report continues to chomp on the networking industry's low-hanging fruit.

Wednesday's $158 million all-stock agreement to acquire closely held data networking shop WaveSmith illuminates the gearmaker's decision to

break from the herd and spend its way back to success.

But while Ciena enjoys some reasonable buying power over other players in a withered tech market, some analysts and investors are wondering if the Linthicum, Md., onetime highflier has bitten off more than it can chew. Ciena's stock, which has lost more than 95% of its value since the communications industry boom ended in late 2000, dropped a nickel to $4.43.

Acton, Mass.-based WaveSmith makes what are called asynchronous transfer mode, or ATM, switches. These network boxes serve as on and off ramps where data merges with conventional phone traffic. The gear helps telcos accommodate growing levels of data traffic on their aging networks, sparing the cash-tight carriers from the need to tear out old gear and buy new-generation equipment.

Channel Checks

The move marks Ciena's first acquisition outside its optical networking territory, which raises some concerns about the engineering challenges the company may face with integration. But Ciena business development chief Beth Perry said the company would make a smooth transition as it inevitably extends its system management applications further into the network.

Telecom equipment rivals like

Lucent

(LU)

and

Nortel

(NT)

have pared back their efforts on a number of fronts and have abandoned several products in an attempt to weather the tech recession. Though Ciena has joined its big peers in cutting jobs, the company has taken the opposite tack when it comes to products, adding offerings via acquisition to expand beyond its optical niche and move toward full service.

While most analysts expressed concern over the company's decision to risk short-term costs on the hopes of gaining long-term sales, many gave the deal their tepid blessing. Ciena had been an early investor in WaveSmith and held a 5% stake in the company prior to the deal.

Among the positive aspects cited by analysts was WaveSmith's small but important customer list. The deal will help open doors where Ciena had been doing some hard knocking of late, say analysts.

"We believe this deal may enhance Ciena's chances of success in selling CoreDirector and Metro optical products into

the Baby Bells in the long term," UBS Warburg's Nikos Theodosopoulos wrote in a report Thursday, referring to Ciena's current product lineup.

Stuffing the Mattress?

But critics question Ciena's decision to issue 36 million shares rather than tap its nearly $2 billion cash pile. Some observers were concerned that it signaled a lack of confidence by management that $2 billion would be enough to sustain the company until healthy sales return.

Ciena's Perry says the company is merely being prudent with its resources. "I like my cash," says Perry, repeating the sentiments of the company's finance officer.

Some critics, including analysts at CIR, an independent networking research shop that broke the news on the planned acquisition more than a month ago, feel that Ciena is spreading itself too thin and may be better off nurturing its strengths in optical technology.

Ciena shares have dropped 10% this week, and the selling continues. The stock was down 9 cents, or 2%, to 4.39 in midday trading Thursday.