Rival sets sights on Nortel

Ciena Corp. (Nasdaq:CIEN) is offering cash and stock worth US$521 million to acquire a chunk of Nortel Network Corp. that includes some of its most prized businesses units, intellectual properties and employees.

TORONTO — Ciena Corp. (Nasdaq:CIEN) is offering cash and stock worth US$521 million to acquire a chunk of Nortel Network Corp. that includes some of its most prized businesses units, intellectual properties and employees.

The Ciena bid covers substantially all of the fallen Canadian technology giant’s Optical Networking and Carrier Ethernet businesses, including the rights to technology that enhances the speed and capacity of current fibre optic networks by as much as 10 times.

Ciena, which had announced earlier this week that it was in advanced talks with Nortel, has also agreed to offer jobs to at least 2,000 employees — which would nearly double the size of the Maryland-based company’s global workforce.

The company, which had been one of Nortel’s smaller rivals in an important market niche, said Ottawa would become home to Ciena’s biggest research and development centre if the purchase is completed.

“It significantly accelerates our current strategy and results in significantly greater revenue growth potential and profitability,” said James Frodsham, Ciena’s Ottawa-based senior vice-president of corporate development.

“We see this as a unique opportunity to bring together two companies that have a highly complimentary set of product capabilities.”

He added that Ciena is committed to “preserving jobs, preserving technology investment and a leadership presence in Canada.”

“More importantly, we see a combination of these two businesses creates an entity that is able to compete very successfully on the world stage,” Frodsham said.

Ciena currently has about 2,100 employees and operates development facilities in Ottawa — where Nortel has long had its main research and development centre — as well as in Georgia, Maryland, California, Washington State and India.

Gary Smith, Ciena’s chief executive and president, said the Nortel assets will be acquired with an aggressive time frame in mind, should the transaction be completed.

“We will draw from the best in our respective organizations, cultures and expertise to ensure that we deliver continuity of supply and innovation for our customers and meet shareholder expectations,” Smith said in a statement.

However, there’s no guarantee the deal announced Wednesday won’t change, since Ciena’s offer will be used as an opening bid for an auction by Toronto-based Nortel under supervision of courts in the United States and Canada.

Nortel, formerly Canada’s biggest technology company and at one time a global leader in the telecommunications industry, has been selling off its global operations piece by piece after seeking court protection from creditors in January.

Next week, Nortel will head to a U.S. bankruptcy court to make Ciena’s offer an official “stalking horse” bid, which means that it establishes a price that could allow other bidders to enter the fray.

The company will also confirm details of the auction process with a judge, which includes determining the submission deadline for a winning bidder.

If Ciena emerges as the winner, it will still require approval from the federal government before the company can take over the assets.

Ross Healy, president of Strategic Analysis Corp., said he believes Ciena won’t run into many problems during the approval process, because it already has a presence in Ottawa, where it employs about 200 workers mostly in research and development.

“Being here very clearly shows that Ciena has a commitment to Canada,” Healy said.

“From a takeover point of view, it suggests they will honour that commitment, which is something the Canadian government would like to see.”

In previous auctions of Nortel business units this year, the final prices have been substantially higher than the initial “stalking horse” bids.

In this case, Ciena, a smaller, less diverse telecom equipment vendor based near Baltimore, Md., is offering US$390 million in cash and 10 million shares of Ciena common stock. The shares are currently worth about $131 million.

Ciena currently has about 91.5 million shares outstanding, meaning what’s left of Nortel or its creditors would end up owning about one-tenth of Ciena’s stock.

The optical and carrier ethernet business units are part of Nortel’s Metro Ethernet Networks. Not included in the sale is a third unit, the Multi Service Switch business, which provides non-optical equipment and employs about 300 people.

Thousands of former Nortel employees in Canada and abroad have been cut loose since late last year — some before and some after the company filed in January for Chapter 11 protection in the United States and under the Companies’ Creditors Arrangement Act in Canada.

Many of Nortel’s former employees and pensioners feel they have been victims of the company’s financial problems and its management’s handling of the restructuring.

A group of pensioners, long-term disabled and former Nortel employees were to protest outside the Ontario legislature in Toronto Wednesday and another demonstration at Parliament Hill in Ottawa is planned for Oct. 21.

Nortel is in the process of establishing auctions for various other pieces of its business. The next in line is its next-generation wireless packet core network assets, which will be officially placed on the black on Oct. 16.

The Metro Ethernet Networks division is considered one of Nortel’s strongest assets and some analysts have said the division as a whole could fetch up to US$1.5 billion. A $1-billion price tag for the optical and carrier ethernet assets is considered within the realm of possibility, depending on how the auction turns out.

Last month, Nortel announced its Enterprise Solutions division would be sold to New Jersey-based Avaya for $900 million. Avaya had originally bid $475 million in July but then had to sweeten the offer to win an auction that began Sept. 11 and lasted several days.

Prior to that, LM Ericsson of Sweden agreed to pay $1.13 billion for Nortel’s wireless network business, beating out a $650-million stalking horse bid put forward by Nokia Siemens, a joint venture between Finland’s Nokia Corp. (NYSE:NOK) and Germany’s Siemens AG (NYSE:SI).

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