Ciena Snags WaveSmith

Optical networking equipment maker Ciena will buy WaveSmith Networks for $158 million in stock as it looks to jumpstart sales by pressing into a new market.

WaveSmith, of Acton, Mass., makes multi-service switching platforms that allow service providers to move from legacy systems to Internet protocol networks as their capital budgets allow.

The deal is reminiscent of the late 1990s, when telecom heavy hitters trolled Massachusetts’ Interstate 495 for attractive startups. Since then, the number of acquisitions has dwindled as has the purchase price.

The companies were well acquainted before news of the acquisition broke late Wednesday. Ciena, of Linthincum, Md., invested in WaveSmith’s third financing round. It also had an agreement to resells WaveSmith’s equipment.

“Restoring growth and profitability to our business in this challenging environment requires that we be willing to take action to expand our addressable market to drive revenue,” said Gary Smith, Ciena’s president and CEO.

Analysts at Infonetics Research estimate the multiservice switch market addressed by WaveSmith’s products will grow from approximately $2.4 billion in 2003 to nearly $4 billion by 2006.

When the deal closes, probably in the third quarter, WaveSmith will be folded into Ciena. It will continue to operate out of its Acton, Mass., headquarters.

Tom Burkardt, WaveSmith’s president and CEO, said Ciena is a good home for because of its “global reach, financial strength, market presence and product strategy.”

WaveSmith was founded in 2000 and is privately held. Last month it inked a multi-year contract with SBC Services. Other customers include GlobalNAPs.

In a note to investors today, analysts at Deutsche Bank Securities (DB) said the wisdom of the acquisition is difficult to gauge since Ciena wasn’t specific about the amount of new revenue that could come out of the deal.

Buying WaveSmith will further muddy Ciena’s costs structure, DB said. On the positive side, however, the purchase lets the company enter a market with an established product.

“We’re on the fence regarding this transaction,” DB concluded.