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Nortel: Ciena Ready to Pay $550M, But Theres Risk

Ciena Corp. (CIEN) reportedly is prepared to pay $550 million for Nortel Networks’ Metro Ethernet Networks unit.

Word leaked yesterday that Ciena plans to pursue buying the division, although no dollar amount was disclosed. Today, that changed.

Thing is, Ciena should brace itself and be ready to pay more. The Ethernet group must be sold at auction and these assets have a way of selling for more than the initial bid amount. Take Avaya Inc., for example. Its original bid for the enterprise division totaled $475 million. The company ended up forking out $900 million.

Ciena also ought to make sure a Nortel purchase is really the right move. Analysts aren’t too bullish on the idea; investment bank UBS, for example, noted that Ciena would have to put significant energy into integration as it transformed from “a product cycle story to one of scale.” Those efforts would include adding at least 1,300 new employees to Ciena’s 2,100-person organization, the firm said, and piling net debt onto the company’s balance sheet.

Consider, too, that Ciena’s reported bid comes to just more than half the company’s 2008 sales numbers of $902.5 million, and nearly half of its $1.2 billion market cap.

All in all, a Ciena takeover of Nortel assets looks pretty darn risky, and Wall Street seems to agree. Ciena’s stocks closed down 7.9 percent on Tuesday, at $13.05.


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