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Ciena Probably Overpaying for Cyan

May, 2015

A prima facie case can be made that the $400 million price tag on Cyan is out of line. In effect, Ciena should have problems justifying it is worth at almost half as much as Nortel’s Metro Ethernet Networks business (adjusted for inflation) and about four times Cyan’s revenues in 2014 – in an optical environment in which it has been recently difficult sometimes to command even 1x sales on an acquisition. Also, with the prospects for SDN in the public network space increasingly getting dimmer, the purchase at a premium is even more of a head scratcher.

With the exception of the buyouts of the Nortel assets (a necessity to keep revenues up sufficiently) and the pickup of Lightera Networks, which led to the successful CoreDirector (a steal at the 1999 price of a little over $450 million), Ciena has in general not had a good track record on buyouts of companies. Since its founding, the supplier invested over $4 billion (2015 dollars) in acquisitions that at least arguably did not turn out to be winners. In some of these cases, the firm simply would jump the gun in misreading the actual signals of the market or even individual customers when it came to new technology or specific vendor solutions.

For example, the initial rationale for the purchase of WaveSmith Networks was based on the mistaken belief that AT&T was going to continue the contractual relationship established by SBC - it had no such intention. Later, Ciena incorrectly assumed that it received a wink and a nod from AT&T that it would purchase technology from World Wide Packets in a big way, which led to a buyout. One may wonder whether Ciena is now putting too much stock in CenturyLink’s leanings towards Cyan’s SDN offering.

Even as service providers are publicly promoting SDN, there is more discussion about the hurdles to overcome than about the positive aspects. The most amusing is the concern about getting five-nines capability because as we pointed out in the past, it goes well beyond that with fears of the whole network collapsing as a result of such a move, especially as it relates to bandwidth on demand.

We understand that the focus of AT&T is more on greenfield types of applications for SDN to avoid conflict with the older networks. Also, an executive at Verizon acknowledged to us that any movement toward such virtualization would have to be done quite carefully. Furthermore, Telefónica has not hidden its stance that its present plans for SDN is limited in nature.

Even Ciena is telling shareholders that the wait for just a decision in moving towards greater automation at such carriers could be as long as 24 months, and this sort of projection in this market often means a much longer time or that hardly anything may actually happen anytime in the future. SDN will likely suffer the same fate as ATM a number of years ago.

Ironically, Cyan is being inundated with legal investigations about getting insufficient value on the sale to Ciena. We think it is clear that Cyan could not have negotiated a better deal.

[written by Mark Lutkowitz]

(For our view on Verizon and metro 100G, please click here.)

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