Oh, how the mighty have fallen. Taking advantage of the bargain-basement deals available in optical networking, CyOptics Inc. is enhancing its manufacturing prowess by purchasing the Allentown, Pa., facility of once-hot startup Cenix Inc. (see CyOptics Acquires Cenix Factory).

CyOptics gains volume manufacturing technology at a time when "volume manufacturing" is a laughable concept for photonics. But the deal is no joke -- CyOptics CEO John Pilitsis sees this as his chance to bring his company closer to the successful business models of the semiconductor industry.

"A lot of people are still looking at this industry as a technology boutique. We're trying to use this disruption and this chaos to put some things together and try to establish an IC-like [integrated-circuit-like] business model," he says.

Terms of the deal were not disclosed, although Pilitsis hinted that the facility went for pennies on the dollar.

The deal is most remarkable in that it marks the end of Cenix, a startup with the highest pedigree. Masterminded by optical investment mogul Vinod Khosla of Kleiner Perkins Caufield & Byers, Cenix had all the makings of a startup star, including Khosla (and Kleiner's) backing and an investment from Cisco Systems Inc. (Nasdaq: CSCO) (see Cenix Backed by Cisco, Kleiner Perkins and KP, Cisco Double Down on Cenix).

Cenix started as an optical-transponder vendor that developed its own automated manufacturing technology, including packaging. It was staffed with refugees from nearby Agere Systems (NYSE: AGR/A). But the company was hatched with the vision of volume production at the peak of the optical bubble. It started winding down last year and finally shut down in January, with rumors swirling that the Allentown facility had found a potential buyer (see Headcount: Tossers and Happy Birthday).

Cenix's Irvine, Calif., facility is not part of the purchase. It's the automated packaging technology that Pilitsis wanted, as it's crucial to his expansion plans.

CyOptics hit the scene in 2000, using indium phosphide (InP) to build modulators for 40-Gbit/s lasers (see CyOptics Targets 40 Gbit/s DWDM Components and CyOptics Claims Modulator Milestone). The company's since downshifted to 10-Gbit/s parts, and it's also branched into the business of hybrid electroabsorption modulated lasers (EMLs), using light sources purchased from JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) (see CyOptics Intros 10-Gbit/s EML).

Much of CyOptics' business is tied to transponders, where customers are looking for more integration and lower costs. CyOptics lacks the electronics expertise to crack the ranks of transponder makers such as JDSU or Agilent Technologies Inc. (NYSE: A), but Pilitsis does want to include more of the optical side than just EMLs.

"We're looking at our InP technology as a photonic-engine integrator, the way some people use CMOS [a manufacturing process for silicon chips] to do what people call system-on-a-chip," he says.

Cenix's packaging capability is a key step towards that goal, according to Pilitsis, since it makes up more than half of a product's cost.

"It especially makes sense if you can get it at the price we bought this at," he says. "[Cenix] did a lot of Cadillac building. They built as though they were going to have lots of volumes, and they got stuck with the infrastructure.".

In fact, more deals like this one are on the way, because plenty of complex technology is available on the cheap. "It's just like a sale at Macy's. When you see something that's on sale, you just gotta buy it," says Drew Lanza, general partner of venture firm Morgenthaler, which has a couple of similar deals cooking.

So what distinguishes a real bargain from a white elephant? A purchase makes sense if a company is expanding horizontally -- that is, to broaden its product portfolio, Lanza says. That's because the large OEMs are looking to trim their roster of suppliers.

"When you talk to Cisco or Lucent, it is really hard to get qualified as a vendor. They specifically encourage our portfolio companies to merge," he says.

What doesn't work is if a firm is chasing vertical integration -- for example, acquiring a service that could otherwise be outsourced. "You end up picking up a lot of cost, which doesn't make sense," says Lanza.

Pilitsis says CyOptics is likewise capitalizing on the sale of Agere's optical components business, hiring some of the employees whose salaries TriQuint Semiconductor Inc. (Nasdaq: TQNT) wasn't willing to pick up (see TriQuint to Acquire Agere's Optics).— Craig Matsumoto, Senior Editor, Light Reading