A long-awaited shoe has dropped in the consolidating optical components market. Late today, Avanex Corp. (Nasdaq: AVNX) announced plans to purchase Alcatel Optronics (Nasdaq: ALAO; Paris: CGO.PA) and some of the assets of the optical components division of Corning Inc. (NYSE: GLW) for stock worth about $63.5 million, based on Avanex's May 9 per-share price of $1.12 (see Avanex Buys Alcatel, Corning Divisions).

Talk of the deal might have been responsible for an unexplained rise in Avanex share prices and trading volumes about 10 days ago (see Avanex Stock Soars).

Under the deal, Alcatel and Corning will transfer more than 1,400 patents to Avanex, and Avanex will continue to contribute optical parts to Alcatel for three years following closure of the deal, which is expected in the third quarter.

"The acquisitions by Avanex will... enable Avanex to offer one of the broadest lines of advanced optical technologies and intelligent photonic solutions to enhance the speed and capacity of optical communications systems," according to the Avanex press statement.

Avanex will part with nearly half of its common stock in the series of transactions: 28 percent will go to Alcatel, 17 percent to Corning. At press time, the employee situation was unclear. Avanex said it would wind up with 1,600 employees, about 400 from Corning. Alcatel Optronics had been winnowing its workforce with a goal of reaching under 500 by the end of this year (see Alcatel Optronics to be Slashed).

The deal is a dramatic conclusion to months of speculation about how Alcatel and Corning would wind up disposing of their photonics divisions, which had burdened both companies during the spending downturn (see Alcatel Optronics Closes 2002 and Corning Q1 Loss Beats Guidance).

The news calls for a reassessment of the optical components market. One question is how the readjustment of power will affect JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU), which has its own set of woes (see JDSU Reports $137M Q3 Loss).

The acquisitions are quite a leap for Avanex, whose employee roster would expand to more than 1,600, compared with roughly 118 in March, according to figures in SEC documents. In a conference call with analysts Monday, company officials repeatedly alluded to an expected restructuring, which seems likely to trim some of that 1,600 staff. Still, some observers prefer this deal to last year's scuttled merger with Oplink Communications Inc. (Nasdaq: OPLK) (see Avanex and Oplink: Wedding's Off). Most analysts believe JDS' wide range of products is a key to that company's post-downturn survival, and the Alcatel-Corning amalgam would bring a similar range to Avanex. "With the acquisition of Oplink, [Avanex] would still have been just a passives business," says Pierre Maccagno, analyst with Needham & Co.. "It's a very complete company, very diversified at this point. The end markets are quite soft, but [Avanex is] positioning themselves well." In Monday's conference call, Avanex CEO Walter Alessandrini said the combined company would have a cash burn rate of $25 million per quarter, not including the costs of expected restructuring. Alcatel and Corning would give $110 million and $20 million to Avanex, respectively, as part of the deal, giving Avanex a cash pool of $250 million immediately following the acquisitions. The Alcatel share is larger because it includes some of the downsizing costs Avanex expects to incur; moreover, Alcatel would receive a larger chunk of Avanex stock than Corning. There's also the fact that Avanex is buying an entire business from Alcatel, warts and all. The Corning deal, on the other hand, involves cherry-picked assets. "We were free to select certain assets and [omit] others," Alessandrini told analysts. Most of the good details are being left until later, including the size of the cuts Avanex would make and the break-even revenue point for the remade company. The deals are subject to approval by Avanex shareholders.

— Mary Jander and Craig Matsumoto, Senior Editors, Light Reading