Tellabs Has A Really Bad Day

Its bid for fiber-optic company Ciena is in peril

For years, Tellabs Inc. has been one of Wall Street's favorite overachievers. The telecom equipment maker could do no wrong as it pushed into overseas markets, acquired several competitors, and kept revenues growing at a 30% annual clip. But suddenly, its future as a telecom behemoth is at risk.

Tellabs' most important deal to date, a one-for-one stock swap with Ciena Corp., is in jeopardy. On Aug. 21, AT&T unexpectedly dumped Ciena as a potential supplier. The news sent Ciena's stock plunging 45%, from $56.78 a share to $31.25. It later recovered only slightly, closing at $34.25 on Aug. 26.

The setback raises questions about the quality of Ciena's main product, which multiplies the bandwidth of fiber-optic cables. And it casts doubt on the wisdom of Tellabs' merger decision. Still, Tellabs CEO Michael J. Birck faces a thorny dilemma: Knowing that others may be interested in Ciena, how hard should he fight to keep the deal?

CISCO TALKS? With investors waiting impatiently, the Tellabs board huddled for more than six hours on Aug. 25 at the company's suburban Chicago headquarters. Birck was unavailable for comment, but sources close to the talks expect Tellabs to offer Ciena shareholders about three-fourths of a Tellabs share for every Ciena share, making the deal worth close to $5 billion, down from the original $7.1 billion.

Though Ciena has said the loss of AT&T won't significantly affect earnings, analysts say a discounted bid makes sense. Not only has Ciena lost AT&T, but it also faces new competition that could lure away longtime customers like WorldCom Inc.

Pursuing the merger with Ciena also makes sense for Tellabs, which makes equipment that connects digital networks. Tellabs needs to diversify its product line, and Ciena will help it move into the fiber-optic arena. Says John B. Leo, vice-president of the Northern Trust Co., a Tellabs shareholder: Without Ciena and its technology, Tellabs' growth "might otherwise slow."

So the risks of a lowball offer are huge, warns Michael Davies, a telecommunications networking analyst at Punk, Ziegel & Co. in New York. Ciena already has been approached by a second suitor. On May 6, a month after Tellabs began its formal talks, Ciena reported in a proxy statement that an unnamed company had expressed interest in it. That company, several analysts say, was Cisco Systems Inc. A Cisco spokesman calls Ciena's wave division multiplexing (WDM) product, which allows networks to carry 40 times their normal amount, "an important technology," but he wouldn't comment on a bid for the company.

Cisco may not be the only suitor that has looked Ciena over either. Analysts agree Ciena would fit nicely with German electronics giant Siemens or network equipment maker Ascend Communications. Both refuse comment on bidding, and a Siemens spokesman says the company will introduce its own, low-end WDM product in mid-September.

Even so, analysts see a Ciena acquisition as a way for Siemens to reel in such U.S. heavyweights as Sprint Corp. and WorldCom. For Ascend, it's the "next logical step," says Timothy J. Smith of tech research firm Dataquest Inc. Ascend, based in Alameda, Calif., also makes digital switches but lacks the kind of optical equipment Ciena makes.

No doubt, Birck and his board are sweating over the risk of getting trumped. But to keep Wall Street applauding, Birck knows he has to keep finding more cards up his sleeve.

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