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Will Cisco fill the breach for Ciena?

In the aftermath of Ciena's failed merger with Tellabs, rumors fly about new suitors and a customer win for the firm.

Will Cisco Systems fill the breach for Ciena?

The rumor mill is working overtime in the aftermath of Ciena's failed merger with Tellabs and the company's subsequent stock drop, a trend that halted yesterday upon rumors of new suitors and a customer win for the firm.

Ciena is in play because its products are near ground zero of the emerging trend toward converged networks within the voice and data communications industries. The company has developed technology that allows carriers to increase the capacity of their fiber networks without adding to their current underground infrastructure, a technique called dense wavelength division multiplexing (DWDM).

That makes Ciena an attractive target for any data networking firm looking to expand its breadth to compete with the likes of Lucent Technologies in the voice-based equipment world.

But analysts wonder just how long Ciena will have a technological edge in the market. Lucent has reportedly cut prices on similar equipment that it offers in an effort to gain market share. Also, analysts are beginning to see DWDM as a commidity technology.

Enter Cisco.

"I think Cisco has to own somebody like this," noted Craig Johnson, an analyst with the Pita Group, an independent technology industry watcher.

"They may strengthen their relationship in the short term and wait until things cool down," he surmised, noting the uncertainty surrounding Ciena at the moment.

The relationship between Cisco and Ciena dates back to this past spring, when Cisco said it would add support for optical-based networking topologies--the dominant technology "fabric" used by telcos--to its line of switching and routing equipment.

Such deals often are an initial step before the data networking giant opens up its checkbook to acquire a firm. Rumors started soon after, but were quickly silenced once Tellabs entered the picture in June.

Cisco executives denied the rumors. "As a public company, we can't speculate on things like that," said Graeme Fraser, vice president and general manager for Cisco's optical internetworking business unit.

A Ciena spokesman, speaking to Reuters, also denied a deal is imminent. Industry sources, however, said Cisco has turned its attention once again to the now-struggling Ciena, a company whose stock hovered in the low 90s as recently as July.

Cisco and Ciena have already added a high-speed interface to the routing giant's 12000 device. The two have also upgraded a segment of the Sprint network to higher-speed OC-48 rates, according to Fraser. That deal is one among several in the works over the next three months that combines Cisco equipment with optical DWDM technology from several players, he said.

"This partnership really has been one that's been formed due to each other's dominant market share," Fraser said. "It's not an exclusive relationship here."

Analysts have said Cisco should have gone after Ciena before Tellabs did so. Going forward, optical technology such as DWDM will add capabilities that allow Internet Protocol (IP) and asynchronous transfer mode (ATM) traffic to coexist on the same network. That development, in turn, will allow carriers and service providers to build networks using fewer devices that contain much more intelligence.

Cisco has made it clear that it wants a piece of the integrated voice and data networking market, pitting it against giants such as Lucent and Northern Telecom--two companies that already boast technology similar to that of Ciena.