Sonoma County: News and Notes

Two weeks ago, I told you that I would focus this week on some tips for my friends at Cyan on being acquired. Being acquired is neither good nor bad. It simply is. About the only surety that one can have in being acquired is that there is change coming. That is where I will focus most of what I say. The challenge is that before I do that, I need to remind everybody that employment is a business arrangement. You trade your time and skill for money. There are likely other things that you get out of working at a certain place, but those are more abstract. And they are the things most likely to change in an acquisition.

First, there will be those that leave at or shortly after the deal closes. A company does not need 2 CEOs or 2 CFOs. Those people are aware of that when these deals happen and are getting a handle on how long they are desired to be around post the close of the deal. Less explicit will likely be the "synergies" gained in G&A. The number of transactions that occur in Finance, for example, will not change that much for the Ciena Financial team when Cyan is added. Cyan will represent about 6% of the total revenue of Ciena. So, there will be work to integrate the systems and then many of the G&A people will be let go.

Groups like Customer Service, Marketing, and Sales will take longer to settle. There will still be a large overlap between the companies. There are only so many carriers and both companies will be calling on many of the same ones. Here a great guide to what will happen is to examine what happened in past Ciena acquisitions. Ciena has bought many companies over the years. The Wikipedia article on Ciena lists a large number of previous acquisitions. Some of those acquisitions transformed Ciena (for example in the Optical Crossconnect space). Other acquisitions failed (like in the DSL space). But the good news is that there is a track record and employees can research how these proceeded.

Finally, there will be the people directly related to product development. Clearly the acquisition is primarily about Blue Planet. Really the question is about the other products. Ciena has products that compete and complement the Cyan box portfolio. There will be a rationalization of R&D spending. I can't tell you how that is going to come out in the end. What I can tell you is that there will not be a lot of R&D spent on directly competing platforms.

Which brings me back to the "Business Deal" part of employment. The people making decisions about how things are going to change are primarily on the Ciena side of the deal. That means decisions that have been made in the recent past or might be made in the near future can be changed. So, as an employee you have to judge what the deal brings to you personally. The deal is good for Cyan as a company and for its shareholders. But nobody is examining what the deal means for your career. It is simply not part of the deal calculus. So, it is imperative that you do that.

What can you do? First, be objective about how decisions are going to be made in the combination. That means studying what happened in past deals. This is especially true for recent deals (World Wide Packets and Nortel Metro Divisions are the most recent). Second, you can do some research on who is going to be inserted into your management chain. You can use Social Media (LinkedIn, Facebook) and Google to learn what they are like. You can connect to past employees and friends to see what they know about the people that are being thrust into your life. You can study Ciena's plans. There are a number of documents available on-line. Take a look at the Ciena Career section. See if there are jobs that are being opened that you might want to do. Because this can be an opportunity as well as a problem. Ciena will open career choices to you that you might not have had in Cyan.

So, study - have a plan - take charge of your career during this transition and good luck!

Jim Sackman Focal Point Business Coaching Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business - Change Your Life!

Sonoma County: News and Notes

First, I want to thank everyone who stopped by my booth at the Santa Rosa Chamber Business Showcase. It was great to chat with old friends and meet some new ones. Attendance seemed very good and there was quite a positive vibe to the people that were there. Whole bunches of Economics is actually more emotional than logical, so I will take that as a good sign. Well, it is time to chat about Cyan Optics. They reported Earnings last week and they were better than Q4. Revenue was $36M and Cyan lost a bit over $10M. Still a big negative to the cash flow, but for the most part these results don't directly matter.

The reason was the other news announced in parallel. That is the proposed purchase of Cyan by Ciena for about $400M. The number is not fixed at this point and we will get to that as we go through this post. This is not Ciena's first venture at buying companies. Ciena has been doing it for years. In fact when I was promoted to the CTO of AFC, Ciena was evaluating a purchase of AFC. This didn't happen because of the type of sale that both that transaction and the current one are.

So, let's talk about this first. This transaction is primarily a stock swap. That means at the close of the transaction Cyan shareholders will receive value of 0.224 shares of Ciena Stock. 90% of this will come in the form of stock and that is the challenge here. If the value of Ciena stock declines, the value of the deal declines. So although the press release declared the deal at $4.75 per share of Cyan stock, this will change until the actual deal happens. When Ciena and AFC talked, AFC stock climbed and Ciena stock declined to the point that the proposed deal did not make sense anymore. So, it was halted.

I don't expect that to happen here. One thing that you can keep an eye on is the Cyan Stock Price. If investors think that the deal will not go through, expect a significant decline in Cyan stock. But today, the whole market is convinced it will go through. Part of the reason is that Institutions and Insiders own 68% of the shares. Presumably they are in favor of the deal so that votes by anyone else does not matter. In fact, Insiders own 48% of the stock today. They probably own a bit more than that as they will likely exercise their conversions and warrants from the notes issued in December. Just FYI, I would expect this deal to close in August or September based on the need for Voting. But that should be rather a formality.

There are several law firms trying to generate lawsuits over the price. I am amused by that as this looks to be a good deal for Cyan. The price is well over 2x Sales and was at a 30% premium to the stock price before the deal was announced. Strategically, the two companies are a good fit. All I can say is that you should check out the law on this now, Tellabs won a Supreme Court case on this a few years ago that might make you think twice before signing up.

I would say the one sour note in the acquisition is that the people that provided funding in December just got a very nice Windfall. They received a blended price of $3.15 per share between the Coupon and the Warrant. A $4.75 share price gives them a gain of around 50% in less than 6 months. That is outstanding returns and was not available to the general shareholders.

Okay, well next week I will review Keysight. The week after I will do a special report on being acquired for those employees at Cyan.

Have a great day!

Jim Sackman Focal Point Business Coaching Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business - Change Your Life!

Sonoma County: News and Notes - Special Edition

As readers, you know one of the things that I do is blog about the local tech companies quarterly earnings. Given the announcement from Cyan yesterday, I think I need to give folks perspective on this complex proposed transaction. You can find a copy of the announcement HERE. Since I think these kind of transactions are hard to understand, I will write about it. This is an offering that dramatically lowered the common stock price and I will explain why. But first, I think I need to put some information around the transaction itself. As a baseline, the company is trying to sell $50M in debt. These are the "Notes" listed in the press release. These Notes will have an interest rate attached to them. This interest rate is unstated but I expect these to have an interest rate above 5% based on current interest rates in the market. Secondarily, there is a "Warrant" attached to the purchase of the Note. The Warrant is the right to buy a stock at a fixed price much like a Stock Option. The reason that the stock took a hit is that it would be expected to have a Shareholder vote to increase the number of outstanding shares. The reason is that if you convert the Warrant, the company will want to issue stock (from its point of view free) instead of paying cash. Since making new Stock does not change the value of the company, the value of the Stock has to change to compensate.

The value to existing investors is that there will be an extra $50M for the company to spend. The goal of that money needs to be to get the company to cash flow positive. Assuming that happens, then this funding will create a lifeline for the firm. The value to purchasers of the Notes is to be determined. Given that the company is losing money, there is no assurance that the interest on the debt can be paid. On the other hand, if the company succeeds the holders of Notes will have an option to buy Cyan Stock at a relatively cheap price (relative to the market at the time). Debt does not actually change the value of a company directly. You get money and owe money back. It is a market cap neutral transaction. The Stock Price change is all about the Warrants.

I won't comment on the existing investors expressing interest in $15M of the $50M. There is no commitment so it is hard to say what will actually happen. The one thing I can say is that if the company does not succeed it will be owned by the Note holders. In that kind of event, the Senior Debt ("The notes will be secured by a first-priority lien on substantially all of the Company’s assets, subject to permitted liens and certain excluded assets.") control what happens not the Shareholders.

Most of you are not going to be able to buy into the Notes. If you can, you certainly have more dedicated advisors than me. So, I want to be clear for the existing Shareholders what this means. This announcement lowers the value of your stock in both the short and long term. Given that you likely bought it at a much higher level than you did now, you need to ask yourself what you should do. My suggestion is to remove the emotion and look at things analytically. You can't change the past, so don't bother trying. So, try to look forward and play out some scenarios. Set sell prices above and below the current value. If the Stock hits those numbers sell. If it doesn't wait until it does. This should be true for every stock in your portfolio.

Have a great day and I was glad to see so many of you at Santa Rosa Connections last night! Jim Sackman Focal Point Business Coaching Change Your Business - Change Your Life! Business Coaching, Sales Training, Marketing Consultant, Behavioral Assessments, Business Planning

The End of Tellabs

Today's Blog is different than the other's I have posted. I am going to talk about the pending sale of Tellabs to a Private Equity Firm for $891M. Given that the revenue of Tellabs should be about that this year the sale is about 1x revenue. On top of that, Tellabs has over $500M in cash. That means that the sale is between 1/3 and 1/2 of current revenue. Not a great price.

Light Reading has full coverage of this and there was a bit of speculation about whether there might be a counter-bid. Tellabs has publicly said that it has talked to over 30 companies so it seems that there will be none.

My time at Tellabs was a mixed bag. I had a great experience while I was at AFC, but Tellabs was nowhere near as rewarding. There were some great people I met, but I thought many of the plans that were set forth made no sense and I said so.  That made me unpopular on a regular basis.

But I thought what I would post about, was how AFC ended up getting an offer from Tellabs. I don't recall the exact date, but it must have been in late Q1 or early Q2 of 2001. I know we had already found that Winstar was going bankrupt and that Tellabs was cancelling all their orders associated with Cablespan. AFC would be okay, but we had just lost about $80M in annual revenue from those two sources. John Schofield and I were in Keith Pratt's office. The telecom world was coming apart around us. Keith was refering to Telecom as a "Toxic Wasteland". People were very happy that we had hedged our Cisco position at $65 a share at that point. Earlier they had been blasting us for it.

The three of us sat around and pondered the future for most of the afternoon. We reached a consensus that our customers would consolidate and that would cause a consolidation in the Telecom Equipment market. We came to the conclusion that AFC was too small to play in a world dominated by major vendors. The conclusion was simple. We needed AFC to grow very quickly or sell it. From that point forward, that was our mission.

I created a list of 7 companies that were potential buyers of AFC. We excluded the Chinese and Japanese from our list. The Chinese would likely be a challenge politically and the Japanese seemed unlikely to purchase a firm of AFC's size. From there, we sent John on a road show to meet the 7 CEOs and see what the possibilities were. The answer was clear: "AFC is a very nice little firm, but we only care about Tier 1 revenue and you have very little of that." So, our strategy became clear. We had to convert AFC to a Tier 1 revenue firm.

We ran a strategic planning process later that year with the idea of getting the rest of the Executive Staff on board with that plan. In retrospective, this plan succeeded wildly. When Tellabs bought AFC in 2004, we had gone from 20% to 65% Tier 1 revenue. Later that percentage went even higher.

When the FiOS win and the Marconi Access purchase became public, things got hot on the M&A front. In the end, we had only 3 companies actually take any kind of look at AFC. Siemens dropped out early as they ran into the scandal that had many executives arrested. Cisco took a purchase to their Board, but I suspect that is when they decided that Scientific Atlanta would be a better deal for them. Tellabs made and offer and most of the rest of that story is very public.

We had anticipated that an AFC/Tellabs combination was too small and the company would have to either buy more or be bought. I understand the plan that Krish had in place was a sale to Ericsson. My understanding is that Mike Birck thought the price was too low. Too bad, the combination would have been right for Tellabs. And here it is now.

Jim Sackman - former CTO of Advanced Fibre Communications
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