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Tuesday, July 25, 2006

Is Ciena For Sale? It Should Be


With private equity firms paying $55 billion for HCA and AMD buying ATI Technologies for $5.4 billion, investors have to ask what the next traunch of buy-out candidates may be.

Ciena is in a tough position. Most of its competitors are more than ten times its size.

The company has a good business, making broadband networks and fiber optics deployments more efficient. The market for this set of products should be very good as telcos roll out their new systems to bring more services like TV to the home.

The stock has fans on Wall Street. Morgan Keegan just upgraded it from "underperform" to "market perform". Not really much of an endorsement.

Ciena is a survivor. And, that may be all its is. First quarter revenue was $120.4 million, up only 2% from the immediately previous quarter. Margins improved, but the company cannot cut costs forever.

Upgrading telco fiber systems with Ethernet switches may be a key component of the new world of a super-fast internet, but comanies like JDS Uniphase, Alcatel, Nortel, and Cisco play in the same sandbox. Ciena's revenue is less than $500 million. Even Nortel brings in $10 billion

According to Morningstar, Ciena's price to book value is 2.8 in and industry were the average is 4.3. It technology and customer list would be very, very valuable to one of its larger rivals. And, the company's market cap is only $2 billion, about four times sales.

Ciena will have trouble competing long-term, but it could make a valuable prize for one of the industries big wheels. Some investment banker is probably pitching the idea right now.

Douglas A. McIntyre can be reached at He does not own securities in companies he writes about.

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