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Contributors: Douglas McIntyre Jon C. Ogg

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Monday, September 25, 2006

Ciena's Reverse Stock Split: Deceit Makes Shares Look Higher

Before you get excited about Ciena (CIEND/CIEN) trading at $29.00+, don't. The stock has completed its 1 for 7 Reverse stock split, and this is taking its share count from 980 million down to 140 million shares outstanding. The pre-split trading close on Friday was $4.29, which translates to a $30.03 base level for the shares to be flat. It hasn't gotten anywhere close to that level today as traders have often engaged in short selling stocks that undertake reverse stock splits. The street often views this is trickery and deceit, and today seems no different from the start. CIEN will trade as CIEND for approximately 20 trading days.

Long-term holders and traders that owned or were Short CIEN should be advised that Ciena will not issue any fractional shares of its common stock as a result of the reverse split. Instead, Ciena's transfer agent will aggregate all fractional shares held by Ciena shareholders into whole shares and arrange for them to be sold on the open market. In lieu of the fractional share, shareholders will receive a cash payment equal to their pro rata share of the total net proceeds of these sales. Shareholders will not be entitled to receive interest for the period of time between the effective date of the reverse split and the date the shareholder receives his or her cash payment. Shareholders holding fewer than seven shares of Ciena common stock will receive only cash in lieu of fractional shares and will no longer hold any shares of Ciena common stock as of the effective time of the split. Based on some past treatments of fractional share sales and the like, it would appear that the transfer agent will sell approximately 3 million to 4 million shares.

A warning should also be issued that many clearing firms, trading houses, and electronic trading systems often have errors and make miscalculations for several trading days after stock splits such as these. It should be expected that it is a smooth transition everywhere, but that just isn't reality.

Soon we will get the same action out of JDS Uniphase (JDSU) as they have filed for a reverse stock split to lower its outstanding shares and to take that price back up. The real loser in this situation is likely NASDAQ (NDAQ) as both CIEN and JDSU have been among the most actively traded stock names on more days than they have not.

Jon C. Ogg
September 25, 2006

Jon Ogg can be reached at; he does not own securities in companies he covers.

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