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.
