Ciena is buying Cyras, a private company that should give Ciena entry in the metropolitan optical networking market. This deal looks good for both companies. Ciena will expand its reach and Cyras will be able to rely on Ciena's strong support to get its still-beta product to market. Even though the stock's taking a hit and earnings will be affected in the short term, the long-term payoff for Ciena should be worth it.
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Optical networking equipment maker Ciena (Nasdaq: CIEN) went holiday shopping today. The company snapped up privately held optical switching company Cyras in an all-stock deal that was valued at $2.6 billion after yesterday's close. Ciena's shares are off about 16% today on the news, bringing the current value of the deal down to about $2.17 billion. The terms of the deal provide for the exchange of 27 million Ciena shares -- about 9.5% of Ciena's shares currently outstanding -- plus the assumption of $150 million in debt in exchange for Cyras. The deal appears to be a positive for both companies involved. Why does Ciena want Cyras? For the company's main product: the K2 Sonet-based platform. The Cyras technology extends the reach of fiber optic networks to users in cities, which should give Ciena the "in" it wants for metropolitan markets. Most of Ciena's products are designed to work over long distances, not the short spaces needed in cities. According to Light Reading , that particular market has the potential to grow to around $10 billion in the next two years, so it's no wonder Ciena would like some of the pie. Ciena said this acquisition was "customer driven." It both extends Ciena's reach and fills a need for the company. The K2 hasn't actually made it past the beta stage yet, but Ciena says it should make it onto the market during the first half of 2001. The K2 has received great reviews and should be a strong contender in a growing and competitive market. An interesting thing about Cyras is that it was spawned from the same company, Fiberlane, which created Cerent and Siara. After Fiberlane imploded and the other companies were formed, all three of them began developing products to attack the same market -- the metropolitan optical networking market. Cerent was bought by Cisco Systems (Nasdaq: CSCO) for $7 billion. Siara was bought by Redback Networks (Nasdaq: RBAK) for $4.3 billion. Both of these deals happened in the fall of 1999. So with the Cyras acquisition, Ciena will be going head to head against both of these companies -- but primarily Cisco -- in this market. For Cyras, this couldn't have come at a better time. The company lost its CEO in September and its VP of North American sales last month. It had hoped to go public by the end of the year, but market conditions were obviously not the most welcoming Cyras could have hoped for. Given that it hadn't yet shipped a product, and given that both Cerent and Siara were acquired, Cyras has to be relieved that it got asked to dance as well. Ciena said that the purchase will dilute fiscal 2001 earnings by $0.19 to $0.22. It expects that it will begin adding to earnings during the second half of fiscal 2002. Even though Ciena's stock is taking a beating today, this deal looks good for the company. It's buying access to a huge market, and is paying less for it than its competitors did likely because of market conditions and the fact that Cyras hasn't actually brought its technology to market yet. The K2 looks like it has the potential to be a standout product, and the short-term earnings per share hit should end up being more than offset by the returns Ciena gets from it in the future.
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