One would struggle to remember a discussion among veterans of the optical equipment space recently contemplating potential mergers, considering a combo between Adtran and ADVA. Over 20 years ago, it might have made “common sense” as Tom Stanton, CEO of the former stated during the combination M&A call. In the late 1990s, Adtran was under the original leadership and excelled at riding down a very long cost curve in offering high-quality platforms. At that time, ADVA was truly hungry to make penetration into the US, and it would have facilitated entry into the largest incumbent operators in the US, assuming that there was enough to adequately distinguish the two product lines. Nevertheless, the potential margins for such hardware were a lot better back then, and ADVA would not have likely been inclined to accept anything resembling an insulting offer. Speaking of that, according to fibeReality’s recent intelligence, ADVA had been consistently making low-ball offers to buy Adtran out (perhaps as long as those 10-plus years, the two firms were in discussions). However, there came a point in which both suppliers became desperate for an “exit,” with ADVA seemingly more anxious to get it completed than Adtran, with the latter certainly in control of the new entity, and the leader of the former will be receiving a demotion. We also do not find it surprising that ADVA’s current CTO, Christoph Glingener, will remain in that position as the Germany-based vendor is a lot more tech-savvy than the engineers at Adtran. Moreover, fibeReality believes that Ciena is even more likely to purchase ADVA, albeit indirectly, assuming this deal comes to fruition.
The hostility toward ADVA’s CEO, Brian Protiva, by Stanton during the combination teleconference was not hidden, further substantiating our understanding of past negotiations. There was nothing positive said of Protiva’s leadership by Stanton despite ADVA being the better financial performer in terms of both revenue and growth margins. Stanton appeared formal and rigid in stating, “I know that Brian Protiva, CEO of ADVA, would like to say a few words (and later that he would “let Brian speak a little bit to the market growth in the metro market itself”).
Protiva had a chance to retaliate somewhat by referring to the deal as “just the first step” and he mentioned “the challenge will be to pick the right opportunities for our combined organization” – a definite statement indicating that the right kind of leadership will be necessary. Still, he was quite gracious to “Tom” and the rest of the Adtran management in his comments. Furthermore, it should be noted that the three financial analysts did a superb job in knocking down much of the empty, positive hype behind the deal, such as in stressing the following four items:
- the “doubl[ing] down in hardware;”
- the already “significant opportunities in Europe” partially because of the movement away from Huawei;
- the challenges to go much beyond what ADVA has already accomplished along with the generic difficulty in tackling integration of the two companies’ solutions; and
- whether customers even care that much about the pending merger.
It was a good thing that Protiva did not confine his words as he was more articulate than Stanton in refuting these points. However, we disagree with Protiva’s emphasis on converged access, when we have pointed out in a 5G X-haul presentation earlier in the year that dedicated fronthaul alone will remain needed in most scenarios. By the fourth point, Stanton was definitely reaching out for further assistance from the individual, who would be his new Executive Vice Chairman.
ADVA did everything in its power to survive as a single entity including the three following ways:
- aggressively pursuing all three X-haul sectors (albeit cutthroat pricing);
- started to sell optical pluggables as a separate business (including joint development work with Cisco Systems, according to our intelligence gathering); and
- as fibeReality was first to report, built a large laboratory in Ontario, Canada, partly to facilitate further penetration into North America (please see: https://www.linkedin.com/pulse/adva-ottawa-connection-endgame-mark-lutkowitz/)
This last matter takes on greater significance as the new “Adtran Holding’s” global corporate headquarters would be in Huntsville, Alabama. Ciena’s acquisition history has been focused on firms that are located in the US and in Canada. Additionally, at the “Morgan Stanley Life After Covid Thematic Conference last November,” Steve Alexander, Ciena’s CTO, stressed that “final assembly is North American-centric,” while also emphasizing “if you didn’t have in-country assets, you had a 1-week, 2-week kind of quarantine period that just slowed things down.”
Then, contrary to Ciena’s SVP OF Global Products & Services, Scott McFeely, at the “Needham Virtual Growth Conference” in January, adroitly directing attention to expectations of “maintain[ing]” its “share of the [total webscaler] wallet,” it seems inevitable that the corporation will take a noticeable hit on revenues by the entry of 400ZR pluggables (as well as future solutions of this type) because the entire metro/regional DCI marketplace will decline in terms of dollar amount. Ciena is best off with a defensive move in striving to cannibalize its own products rather than just letting competitors do it for the system house, not to mention avoiding the alienation of the hyperscalers. fibeReality has also discussed how the supplier is forcefully positioning itself in striving to ameliorate any damage to its financial condition.
fibeReality believes that Ciena will eventually need to buy some market share to make up for the shortfall in sales. While it would not be terribly enchanted by the PON offerings, and access optics in general can be a burden with margin-generation, Ciena would be in an even better situation to go after the space, which will be new to it on the optical side of the house, with its coherent offerings, after a future purchase of “Adtran Holdings.” Similarly, when Ciena bought Cyan, it did not retain the metro assets.
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