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Investors wary of Ciena deal
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December 19, 2000: 5:12 p.m. ET
Optical networks maker buys Cyras for $2B, but shares tumble on earnings fears
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NEW YORK (CNNfn) - Optical telecommunications gear maker Ciena Corp. agreed Tuesday to buy closely held Cyras Systems Inc for about $2 billion in stock, but drew a harsh reaction from investors who were disappointed with the merger's short-term negative impact on earnings.
The acquisition will significantly expand Ciena's optical networking capabilities while allowing Cyras, a producer of optical switching equipment for metropolitan area networks, to leverage Ciena's existing transport networks in large metropolitan regions.
Terms of the agreement call for the Linthicum, Md.-based Ciena to swap 27 million shares for Fremont, Calif.-based Cyras, in addition to assuming $150 million of Cyras debt. The companies hope to complete the transaction during the first quarter of next year.
Ciena said the transaction will dilute its 2001 pro forma earnings by 19 cents to 22 cents a share before adding to earnings during the second half of its fiscal 2002 year. Analysts polled by research firm First Call Corp. were expecting the company to earn 70 cents per share during its 2001 fiscal year ending Oct. 31.
 The lower earnings estimate sent Ciena (CIEN: Research, Estimates) shares plummeting in Tuesday trading. The stock closed down $23.19, or more than 24 percent, to $73.19.
The stock traded down all day, but fell sharply in lockstep with the Nasdaq market after the U.S. Federal Reserve elected to leave interest rates unchanged at 2:15 p.m.
"I certainly think the dilutive nature of the deal caused this," said Steven Levy, an analyst with Lehman Brothers. "This is a deal that a few months ago might have driven the stock up. So it's interesting to see how the market psyche has changed."
Indeed, the swift decline of Ciena's shares shaved more than $600 million off the deal, which was valued at slightly more than $2.6 billion at the start of trading Tuesday.
Ciena said that through the use of Cyras products, the acquisition will boost its position as a next-generation equipment provider and provide customers with an immediate 10- to 40-fold increase in price and bandwidth efficiencies over current network solutions.
Optical networking, which is the transmission of data using photons of light carried over optical fibers instead of electrons carried over copper wires, has been one of the hottest sectors in the market over the past year, with many stocks in that area more than quadrupling over the past 52 weeks.
However, those stocks were dragged down sharply in late October after Nortel Networks (NT: Research, Estimates) third-quarter revenue fell short of analysts' expectations.
Shares in optical stocks recovered somewhat though after JDS Uniphase (JDSU: Research, Estimates), the world's largest supplier of components for fiber optic networks, reported a fiscal first-quarter profit that topped expectations on stronger-than-expected revenue. 
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