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!
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