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Ciena Acquires Nortel’s Assets

Ciena Corporation ( 15.38 0.00 0.00%) announced that it has completed the acquisition of substantially all of the optical networking and Carrier Ethernet assets of Nortel Networks' ( 0.32 0.00 0.00%) Metro Ethernet Networks (MEN) business for $773.8 million in cash.
 
Ciena said that the purchase price will be subject to adjustments based upon the level of net working capital transferred to Ciena at closing, which is currently estimated to result in a downward adjustment to the aggregate purchase price of approximately $62 million.
 
Ciena has made a series of acquisitions to expand its addressable market and enter new growth markets. Ciena will take over Nortel's long-haul optical transport portfolio, metro optical Ethernet switching and transport solutions, Ethernet transport, aggregation and switching technology, multiservice SONET/SDH product families and network management software products.
 
Ciena expects the deal to be significantly accretive to its operations in fiscal 2011. Ciena has completed the applicable regulatory reviews in the United States and Canada. We believe that the deal has the potential to drive significant growth in Ciena's rapidly expanding metro Ethernet business and optical networking products.
 
The Nortel deal would be the largest ever for Ciena and would also help it expand geographically and provide better cross-selling opportunity. It will also enhance the company's existing Canada-based development resources, making Ottawa its largest product and development center.
 
Also, the merger could double Ciena's revenue, as Nortel's Ethernet business generated approximately $1.18 billion in revenue in 2009.
 
While, the Nortel acquisition will enable revenue growth, integration risk is a major issue in our opinion. Ciena will incur integration-related costs of approximately $180 million in the first 12 months of closing the deal, which will also dilute its earnings.
 
The deal will also pull Ciena into a net debt (debt exceeding cash) position and result in lower operating cash flow. The company recently raised $375 million in convertible senior notes to help finance the purchase of Nortel's assets.
 
To benefit from the acquisition, Ciena has appointed Philippe Morin, previously president of Nortel's MEN division, as Ciena's Senior Vice President, Global Products Group. The company plans to announce the combined portfolio update on March 22, 2010.
 
Although, the deal will be significantly accretive to Ciena's operations in fiscal 2011 and drive much higher revenue and profit growth, near-term results are expected to be pressured due to increased expenses related to the acquisition of Nortel.

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