Ciena Gets Nortel’s MEN; NSN Faces Uncertainty

Now that Ciena has claimed Nortel’s Metropolitan Ethernet Networks (MEN) business assets, which include optical- and Ethernet-networking products and technologies, questions linger about what exactly transpired and what happens next.

Ciena’s winning bid was worth $769 million, about $248 more than the stalking-horse bid it submitted in October. Comprising $530 million in cash and $239 million in senior convertible notes due in June 2017, Ciena’s bid topped an indeterminate offer put forward by ambivalent Nokia Siemens Networks (NSN), which did its best afterward to rationalize why it didn’t come away with the auction prize.

The big winners in this auction are Nortel employees. About 85 percent (2,000) of Nortel’s MEN personnel will join Ciena, presuming the deal clears regulatory hurdles. The transaction must receive court approval in the United States and Canada, which it expects to get at a joint hearing December 2, as well as in France and Israel.

Based in Linthicum, Md., Ciena practically doubles in personnel as a result of the acquisition. It also gains about 1,000 new customers spread across 65 countries. Included among those new customers are carriers AT&T Inc., Verizon Communications Inc. and Comcast Corp.

Ciena says the deal will be “significantly accretive” to its operations in fiscal 2011. As noted by the Wall Street Journal, Nortel was a leader in developing 40 gigabit optical-networking equipment, allowing carriers to quadruple their network capacity without incurring much additional cost. It is also among the industry leaders developing the next-generation 100-gigabit optical-networking technology.

But the past tense of the preceding paragraph is notable. Like the rest of insolvent Nortel, the MEN business has struggled under the purgatory of bankruptcy protection. For the first nine months of this year, Nortel’s MEN business reported revenue of $988 million, down 21% from a year earlier. Results have been gradually worsening. In the latest quarter, Nortel’s MEN revenue fell 26 percent to $295 million in relation to the corresponding quarter last year.

While the market for carrier-Ethernet gear continues to grow, even during a downturn that has inhibited expansion in most carrier-related market segments, competition is fierce. Infonetics expects the market for carrier-Ethernet equipment to reach $34 billion by 2013, growing from $17 billion in 2008. Nonetheless, competitors including Huawei, Alcatel-Lucent, Ericsson (Redback), ZTE, and Extreme Networks. The added scale that Nortel brings to Ciena will help, but it doesn’t guarantee success.

Besides, as many analysts have noted, Ciena and its executive team have no experience integrating an acquisition of this size. Any student of technology acquisitions will tell you that more is likely to go wrong than to go right, especially when the team managing the integration hasn’t had the benefit of previous experience in similar circumstances.

Still, there’s no question that Ciena’s leadership is confident of being on the right track and will do its best to leverage what Nortel’s MEN assets offer. The same cannot be said for Nokia Siemens Networks (NSN), the Swedish-German joint venture that finds itself back in limbo after this auction. Having already fallen short of the mark in a bid for Nortel’s wireless assets, ultimately captured by Ericsson, NSN now has been a two-time loser in the Nortel auctions.

Bidding this time in conjunction with private-equity firm One Equity Partners, Nokia Siemens Networks (NSN) was at pains to justify its failure to overtake Ciena in the MEN auction ring. In a terse statement posted on its website, NSN said the following:

Nokia Siemens Networks confirms that, with its financial partner, it did not submit the highest bid for Nortel’s optical networking and carrier Ethernet assets in the bankruptcy court-sanctioned auction that began on Friday morning and extended through the weekend. Nokia Siemens Networks believes that its final offer represented fair value for the assets, and further bidding could not be financially justified.

It’s possible that the auction bid for Nortel’s MEN assets was something of a Hail Mary pass for the joint-venture partners. Now that it has fallen incomplete, Nokia and Siemens are likely to reconsider their commitments to the venture. Many think Siemens will want out of the arrangement. Meanwhile, Nokia might not have the fortitude or resolve to buy out its partner’s stake in the company. There’s a reasonable possibility that the joint venture might seek another partner or put itself for up for sale completely.

As for Nortel’s creditors, they must be pleased. At the end of the auction, they received a winning bid that was nearly a quarter-billion dollars more than the initial stalking-horse offer from Ciena. It wasn’t quite the $1.13-billion payday they derived from the sale of Nortel’s wireless assets to Ericssson, nor the more than $900 million they got from Avaya for Nortel’s enterprise business, but it wasn’t bad.

Gradually running out of assets to sell, Nortel is expected to make an announcement about the sale of its Global System for Mobile Communications (GSM) business later this week.

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