Ciena Must Avoid “Winner’s Curse” in Nortel Auction

Some market analysts now are expecting Ciena to have to fend off competing bids in its attempt to acquire Nortel’s Metropolitan Ethernet Networks (MEN) business, according to a Dow Jones Newswires article.

The article, also available here (for those of you without WSJ subscriptions), cites Nokia Siemens Networks and Fujitsu as potential bidders.

Employing a mix of cash and stock, Ciena’s $521-million stalking-horse (lead) bid for insolvent Nortel’s MEN assets is on the outer limits of what the company can support financially. If other bidders throw their hats into the auction ring, Ciena will be forced to withdraw from proceedings or put itself at risk by paying a prohibitive price to capture the prize.

Not everybody is sure the prize is worth owning, particularly at exorbitant cost. RBC Markets’ Mark Sue, among others, has warned Ciena not to fall victim to the “winner’s curse” of overpaying for the privilege of owning an asset.

No vendor should bid on the assets unless it actually wants to own them, but it is possible that a bigger, richer player than Ciena could indulge in brinkmanship, especially if it has inside knowledge of how badly (or not) Ciena wishes to own the Nortel assets. That other vendor would merely enter a higher bid in the knowledge that Ciena would escalate, thus paying more to triumph at auction.

Again, it’s not a course of action a vendor should follow if it has no interest in Nortel’s MEN assets, but it is something a Ciena competitor might consider if it has both interest in the assets and wants to make sure that Ciena would have to stretch itself to the financial breaking point to close the deal.

I’m just not convinced Nokia Siemens Networks or Fujitsu cares enough to play that game — and I don’t see anybody else on the immediate horizon. I am sympathetic to the analysts who see Nortel’s optical and Ethernet assets as mixed bag, replete with legacy products and technologies. Yes, there are some vibrant bright spots amid an otherwise drab product portfolio — and some of the customer relationships could prove lucrative if managed properly — but does anybody want to pay close to a $1 billion for this particular assemblage of Nortel assets?

I don’t think so, and I suspect any potential counterbid that might materialize would not be dramatically above the stalking-horse marker.

Ciena should have a clear idea, from the outset, as to precisely what price it is willing to pay. For the sake of Ciena shareholders, I hope that price is not much more than the current bid.

Ciena CEO Gary Smith has said Nortel’s MEN assets are perfect complements to Ciena’s core business and product portfolio. There are product overlaps, however. Smith also says his company could successfully integrate the Nortel assets, even though Ciena has struggled with past acquisitions.

Even if Smith is right on both counts, Ciena still needs to avoid overpaying for the Nortel properties. Overpaying probably would be defined by any amount much above the current bid.

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