NeoPhotonics Corp. has completed its acquisition of Chinese vendor Photon Technology Co. Ltd., a deal that gives Photon greater visibility in the U.S. while bringing NeoPhotonics up in the optical component ranks.

Because the deal required multiple approvals from the Chinese government, NeoPhotonics first acquired the state-owned piece of Photon, as announced in March. NeoPhotonics announced today that it received Chinese government approval to acquire the rest of Photon, held by owners including Concord Investments of Hong Kong and about 10 other entities (see NeoPhotonics Acquires Photon Stake and NeoPhotonics Acquires Photon).

As one might expect, the process was a lot more complicated than buying a U.S. private company.

"They're putting a state asset in the hands of a foreign entity, and they have to make sure the entity is in good hands," says Tim Jenks, NeoPhotonics chairman and CEO. "There are about six different government agencies, all of which must say yes in order for such a transaction to go through."

The deal could be a milestone for both companies. NeoPhotonics increases its product breadth and adds 1,200 employees to its roster of 100. Photon, while already doing substantial business outside China, gets a stronger foothold in North America.

The combined business runs at $50 million per year in revenues and is growing at 50 percent per year, Jenks says. Photon CEO Zhangyong Huang will become vice chair of NeoPhotonics' board. (It is assumed executives won't go with the cool looking "PhotonNeoPhoton" as a name for the combined company.)

The size of the acquisition is daunting, but Photon is already profitable, so the employees "are all paying their way," Jenks says. NeoPhotonics itself is not breakeven yet, although this deal "brings it in closer," he notes. "It'll take us about another year."

A few years ago, NeoPhotonics appeared destined for the optical trash heap that claimed most components startups of the 1999-2000 bubble. Like many other components plays, NeoPhotonics was crafting Photonic Integrated Circuits, trying to endow optics with the kind of integration enjoyed in the semiconductor realm.

But the company held on, acquiring Lightwave Microsystems in 2002 and more recently targeting some products at the hot fiber-to-the-home (FTTH) market. Investors had enough confidence to give NeoPhotonics $40 million last year (see NeoPhotonics Buys Lightwave Micro and NeoPhotonics Chases Access).

With Photon, NeoPhotonics moves into new product areas including transceivers and ROADM components. The deal "gives the combined company the ability to offer an extremely broad product line," Jenks says. "It's been a while since there was an alternative to the big three or four in the industry."

The "big three or four" consist of unquestioned leader JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) and the companies vying for the second spot: Avanex Corp. (Nasdaq: AVNX), Bookham Inc. (Nasdaq: BKHM; London: BHM), and TriQuint Semiconductor Inc. (Nasdaq: TQNT) all made risky acquisitions to claim that spot, but a continued weak market, thanks in part to persistently low prices, left all three in the lurch. TriQuint called it quits earlier this year, selling its components division, acquired from Agere Systems Inc. (NYSE: AGR.A), to CyOptics Inc. (See Bookham Buys Nortel's Components Biz, TriQuint to Acquire Agere's Optics, Avanex to Buy Alcatel, Corning Units, and TriQuint Exits Optics.)

Photon is no neophyte in global markets, as more than half its business comes from outside China, Jenks says. Founded in 1993, the company extended its reach with a joint venture with Ortel, which was acquired by {dirlink 2|94} and later became part of Lucent spinoff Agere. That deal ended when Agere sold the Ortel business to Emcore Corp. (Nasdaq: EMKR) in 2003 (see Emcore Buys Agere's Opto Biz).

The deal reflects the increasing importance of China to the optical components industry. Dozens of optical components vendors have emerged in China, some of which are ready to expand into other markets. This is happening all over Chinese industry: In the systems world, for example, Huawei Technologies Co. Ltd., UTStarcom Inc. (Nasdaq: UTSI), and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) are growing in influence, as noted in a recent Light Reading Insider report (see China's 'Big Three' Eye IPTV).The closest parallels in components might be Photon or Fiberxon Inc., which is based in China but was created as a U.S. company with hopes of a U.S. IPO (see Fiberxon Adds $20M).

Meanwhile, optical components firms in North America and Europe are increasingly turning to China for manufacturing and assembly; in fact, Avanex, Bookham, and JDSU all have operations in China. In a sense, photonics is becoming a China-based industry.

In photonics, as in other industries, Chinese firms hold a reputation in the West for lower quality. But there's an obvious parallel to Japan's electronics business, which went from cut-rate products in the 1950s to a leadership position. "I don't know that China will repeat what Japan did," says Tom Hausken, an analyst with Strategies Unlimited, "but certainly China can buy its way into becoming more competitive on a global scale."

Hausken adds that Chinese industry has enough resources to create some intriguing scenarios should Avanex or Bookham falter (see Components Competition Is Killing). "It wouldn't be too hard for some Chinese company or another investor to take over if something catastrophic happens" to a large components firm, he says.

— Craig Matsumoto, Senior Editor, Light Reading