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This Was a Messy Deal

By Anders Bylund | More Articles
September 8, 2010 | Comments (3)

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Growth by acquisition is a perfectly sensible strategy; neither IBM nor Oracle would be what they are today without an open-wallet buyout binge or two. Smaller players like TTM Technologies (Nasdaq: TTMI  ) prove that you can grow by leaps and bounds by doubling in size through acquisitions -- without turning profits into losses in the process.

But I guess CIENA (Nasdaq: CIEN  ) didn't get the memo. Third-quarter sales took a 136% year-over-year leap to $390 million, and 56% of total revenue came from the recently closed buyout of Nortel's metro Ethernet networks. With economies of scale come cost savings and stronger earnings, right? Not this time, at least not yet. The year-ago period's $0.05 of non-GAAP losses per share nearly doubled to $0.09 per share. In spite of management talking up how smoothly the integration is going, this merger of equals is painful.

I'd be happy to cut CIENA some slack until the whole affair is properly sorted out, but this is a particularly bad time to be off your game for any reason. CIENA's bread and butter is providing a range of products and services to telecom operators, and that business looks set to explode over the next year or two as AT&T (NYSE: T  ) , Verizon (NYSE: VZ  ) , and Clearwire (Nasdaq: CLWR  ) all build out their next-generation LTE and WiMax wireless networks. If CIENA loses out on this bonanza because its customers are wary of buying from a company in transition, it'll be another four or five years before the next big-time upgrade cycle rolls around.

Nortel may help CIENA in the long run, but will the company make it that far without being chopped up and sold for parts itself? I'm not so sure. Share your thoughts on this matter in the comments below.

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Fool contributor Anders Bylund holds no position in any of the companies discussed here. TTM Technologies is a Motley Fool Stock Advisor selection. The Fool owns shares of Oracle. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 08, 2010, at 10:05 PM, jimmybenning wrote:

    the market seems to disagree with the author.........

  • Report this Comment On September 09, 2010, at 2:29 AM, aswong wrote:

    Of cause there are risks of consolidation. Average estimate was for -33 cents and actual was much better. You assumption of a "mess" does not seem justified.

    Ciena still has to prove to make this acquisition work. The market seems to be on the optimistic side since the report.

  • Report this Comment On September 09, 2010, at 3:01 PM, WiMAXPro wrote:

    Ciena faces the same trends in the market that forced problems at Motorola, Nortel and other communications sector companies: increased international competition, particularly from the Chinese companies, and consolidation of business into managed solutions that can include planning, product acquisition and management of networks.

    Nortel collapsed for a number of reasons which boil down to it having become difficult to operate in North America with all of the entitlements, financial entanglements, and high cost of doing business in a hemisphere beset with structural problems that contribute to high costs and misplaced priorities. Ciena and its investors are foolish if they think it will be easy to pick up the mess and turn the assets into a well oiled machine. The task starts out having to deal with basic issues of cost structure with a possible conclusion that doing business as a hardware supplier based in North America is only as good as the Congressmen you can buy and influence into monopoly treatment similar to the medical, oil and military industries.

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2/10/2012 3:59 PM
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