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Oh CIENA! Tellabs shuns takeover

Investor reaction to blame

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In a blizzard of press releases, CIENA Corporation has confirmed the "mutual termination" of its planned merger with Tellabs. CIENA blames "investor reactions to events of the last several weeks" for the amicable parting of the ways. "The ultimate ability to obtain shareholder approval for the merger and made it difficult to move forward with the kind of momentum needed to realize shareholder value," it says. As you recall, CIENA's stock went into freefall, following its failure last month to win a mega-contract to supply AT&T with its optical networking equipment. Tellabs said then that it would press ahead with the takeover but on greatly reduced terms. But failure last week to secure another big contract for its wavelength division multiplexing (DWDM) systems sent shares spinning down a further 29 per cent. This was too much for even the most gung-ho Tellabs investor. Tellab shareholders would have been very unwise to wave through any deal, until doubts over CIENA's ability to sign up new customers are resolved. The collapse may be personal business disaster for Patrick Nettles, CIENA's president and CEO, but boy does he do a good impression of Pollyanna. "While we are disappointed that our plans with Tellabs will not come fruition, we remain excited about our future as an independent entity," he says. This is simply not true. Nettle's credibility with investors is undermined -perhaps fatally - and the company is up for sale. "Over the short-term,", Nettles continues with a euphmism of the highest order, "CIENA will continue to face the challenges associated with expanding our customer base". On the bright side,the core elements of our business remain strong." CIENA's team spirit is "indomitable", the company has $200 million cash in the bank and it is the only "DWDM vendor commercially shipping a 40-channel system with more than one million channel kilometers installed for customers on three continents". This adds up to 11 big telecoms customers, so there is plenty of opportunity. It also makes the company very vulnerable to the whims of its customers. On the less bright side, CIENA is having to discount prices to keep customers happy. Discounting is of course a relative concept. The company now has to get by on gross margins of 45-50 per cent. But with rivals like Lucent, the company's $200 million cash pile won't go very far if the market descends into a real do-fight. Q3 earnings at $129 million, are up slightly on last years $121 million for the quarter. But Q4 revenues will be materially below those reported for the third fiscal quarter, due to "uncertainty created by the events of the last few weeks and attempts of our competitors to capitalise on that uncertainty may delay or alter some customers' near-term purchase decisions". The company is restructuring its sales and marketing organisation, as part of its mission to restore shareholder value. Pollyanna Nettles says: "As an emerging company, CIENA has battled the underdog status for most of its corporate life. As a team, our employees have faced and conquered enormous hurdles and their spirit is unyielding. Ultimately, it is these highly motivated people, our field-proven products, and our industry- leading technology that will enable us to capitalise on the opportunities ahead." This is eyewash. Being a overdog is so much more fun. That way your salespeople get to sign up new business.®

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