Light Reading
The biggest optical merger in years creates a legitimate challenger to No. 1 supplier JDSU

Finisar & Optium Challenge JDSU

Craig Matsumoto
News Analysis
Craig Matsumoto
5/16/2008
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Finisar Corp. (Nasdaq: FNSR) and Optium Corp. (Nasdaq: OPTM) are joining forces in an all-stock merger, a deal that at long last creates a large-scale optical competitor to JDSU (Nasdaq: JDSU; Toronto: JDU).

It's one of those merger-of-equals deals, with the companies pooling stock and the two CEOs sharing the helm. Each Optium share would be traded for 6.262 Finisar shares, making the deal worth $244 million as of Friday evening. (See Finisar/Optium Merge.)

The new company will be called Finisar and will retain the FNSR stock ticker.

Finisar shares rose 20 cents (15%) to $1.53 today, while Optium climbed 89 cents (10.9%) to $9.03.

JDSU has lorded over a weakened optical components field for years -- the entire century, come to think of it -- but that reign appears to end here.

Finisar and Optium say they've had combined revenues of $554 million for the past 12 months. JDSU, for its recent third quarter, reported optical components revenues of $136.1 million, implying an annual rate of $544.4 million. (See An Optical Merger!)

On top of that, Finisar and Optium both raised their revenue forecasts for this quarter, to $120 million and $45 million, respectively.

It's not surprising that investors like the deal, considering the optical components industry has long awaited a large merger. Avanex Corp. (Nasdaq: AVNX) and Bookham Inc. (Nasdaq: BKHM; London: BHM) reportedly came close to a deal but never pulled the trigger. (See Will Avanex Hook Bookham?)

A large deal was necessary, many said, in order to curb the oversupply in the industry. The aftermath of the telecom crash after 2001 left many components suppliers still on the map. In competing with each other, they kept pushing prices down, a key factor that turned profitability into a years-long quest for most players.

Finisar and Optium have so little overlap among their products that their merger isn't liable to eliminate much capacity. But the deal creates a powerhouse that will stand out at a time when customers -- Cisco, most notably -- are trying to limit the number of suppliers they work with.

That process has handed JDSU a big advantage, one that the new Finisar hopes to share.

Along those lines, the merger would create more of a headache for the rest of the field -- more so than for JDSU.

"The key is that it probably turns up the heat on Avanex and Bookham to merge with someone," Harmon says. "I don't think JDSU reacts. They've got a lot of businesses to manage and a lot of work to do."

The deal started with a call from Rawls nine months ago. Finisar has been making acquisitions to increase its telecom portfolio, and Optium's 10-Gbit/s tunable transponders represented a profitable product line that Finisar so far lacked.

"Optium products are in categories that Finisar wants to enter, so it's going to save Finisar huge amounts of R&D dollars," Harmon says.

Finisar could have continued acquiring smaller companies, but it was starting to show signs of wariness about that strategy. In getting into the reconfigurable optical add/drop multiplexer (ROADM) market a few months ago, Finisar chose to invest in tiny Nistica rather than acquire the startup. (See Finisar Moves Into ROADMs.)

What Optium gets out of the deal is the breadth to be in JDSU's league, and an in-house source of components that it can "cherry-pick" from, Harmon says. Optium's transponder business is fabless; the company buys components from the outside and assembles them itself in a Pennsylvania facility.

That facility wouldn't be going away; Optium has always said it gets an advantage from the customization that's possible there. Finisar does its manufacturing in Malaysia, but that's because its products go into more mass-production markets than Optium's.

"At Optium, we make 30,000 to 40,000 modules per quarter. At Finisar, you're making 3 or 4 million modules per quarter, and they're for different kinds of products," Optium CEO Eitan Gertel says.

As for who exactly is piloting the new ship, Rawls will take the title of Chairman while Gertel will be CEO, "but we're going to share the top job, whatever you want to call it," Rawls says. He likens it to Finisar's earlier days, when Rawls and Frank Levinson effectively ran the company together.

For more on Finisar's telecom ambitions and Rawls's view of the industry, check out the video below.

— Craig Matsumoto, West Coast Editor, Light Reading

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Pete Baldwin
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Pete Baldwin,
User Rank: Light Beer
12/5/2012 | 3:40:44 PM
re: Finisar & Optium Challenge JDSU
OK, sure, every optical stock is down since a year ago, by quite a bit. Even so ...

Optium and Finisar don't track each other exactly, but comparing both from Optium's IPO day til now, they're down by a similar amount percentagewise (Optium is just less than 60%, Finisar more.)

Comparing them even to 1-year-ago prices, Optium clearly wins -- down about 45% to Finisar's 63% (I'm eyeballing these off Yahoo charts). I wouldn't have expected Finisar to be down that much more.

None of this proves anything (see first sentence) but it was an interesting exercise.
Pete Baldwin
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Pete Baldwin,
User Rank: Light Beer
12/5/2012 | 3:40:44 PM
re: Finisar & Optium Challenge JDSU
So, this might be the big deal that starts to alter the landscape of optical components.

I'd guess this will spur other deals to happen -- John Harmon's point about the pressure on the next-tier players seems right.

It's Optium's ticket to really join the big time, too. They were broadening with Engana, but they'd have trouble getting to this level on their own.
^Eagle^
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^Eagle^,
User Rank: Light Beer
12/5/2012 | 3:40:43 PM
re: Finisar & Optium Challenge JDSU
Both companies needed each other. In many ways it was a marriage more of necessity than convenience.

Finisar had a very large debt coming due and did not have the cash to pay it. Optium had $50M plus in the bank.

Finisar was 4x larger than Optium in revenues, but barely breaking even. Profitable in some quarters, not in others. Optium was profitable. Not gloriously so, but profitable.

Finisar had some manufacturing and chip capability that will help Optium. Optium has the operational discipline to make a profit.

Finisar has a larger revenue and customer base.

Eitan gets to pilot a large empire. Jerry gets to take a slightly less stressful role and over time ease into future retirement.

Optium while smaller than Finisar, is growing faster with products with better margins. But needs scale. Finisar needed faster time to market with "telecom" products. Finisar was slow and far behind on transponders, transceivers, 40G, etc. for telecom links.

But, with Finisar's large presence in enterprise, access and client side, and Finisar has bigger buying power with suppliers and a larger manufacturing base.

However, I think the predominate reason for Finisar were buying into a faster, profitable growth engine and getting access to Optium's cash to service the debt instrument that was coming due. for Optium, other reasons lead to saying yes.

Sailboat
deer_in_the_light
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deer_in_the_light,
User Rank: Light Beer
12/5/2012 | 3:40:42 PM
re: Finisar & Optium Challenge JDSU
Another interesting question? What will happen with Nistica ?
Must be kicking themselves for their deal with FNSR. With the Engana WSS, FNSR does not need Nistica anymore.

Who will now want to marry a pregnant Nistica ?
deer_in_the_light
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deer_in_the_light,
User Rank: Light Beer
12/5/2012 | 3:40:42 PM
re: Finisar & Optium Challenge JDSU
I think it is a great combination that will put immense pressure on JDS.

The fact that the optical component business at JDS is still losing a lot of cash while roughly at the same level as the new Finisar/optium should raise eyebrows. JDS got away with being complacent about its internal execution spending lots of R&D, sales and marketing $ without creating much return for its investors. Some of that weakness was hidden behind the solid margin of Acterna, now the street has a benchmark.

The FNSR/OPTM combination is delivering much higher returns than JDS, what is Kennedy going to do about it ?
rahat.hussain
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rahat.hussain,
User Rank: Light Beer
12/5/2012 | 3:40:42 PM
re: Finisar & Optium Challenge JDSU
sailboat - i think you nailed it! great concise analysis.

odo
Riverhigh
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Riverhigh,
User Rank: Light Beer
12/5/2012 | 3:40:41 PM
re: Finisar & Optium Challenge JDSU
From my understanding Nistica was not up for sale as local management wanted to add value to the company. I guess in layman's language that means they wanted a higher price for their company.

I would be interested to know what happens now. Does Finisar sell ROADMS made by Nistica, Optium or both. Any ideas?

^Eagle^
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^Eagle^,
User Rank: Light Beer
12/5/2012 | 3:40:40 PM
re: Finisar & Optium Challenge JDSU
Perhaps a 3rd point of view. Engana / Optium with the WSS has a ROADM more suitable to metro and LH DWDM with channel counts that are 16 -32 - 40 -80 +.

The Nistica ROADM was optimized for price / performance at the edge or access with channel counts at 4 - 8 (16 at the most dense) wavelengths and dropping a small subset of the lambda's. Nistica's is a much simpler ROADM with fewer "degrees" of freedom than Optium's.

So maybe product families will survive for a period.

At least until it is decided if the Engana WSS can cost effectively address the edge.

Of course a more fundamental issue will probably decide the fate of the Nistica - Finisar - Optium relationship. How good a job Nistica staff gets along with Eitan's team.

I have heard Nistica wants too much money to sell out completely. I doubt Eitan will put up with or accept that. And I cannot see Eitan continuing with a "reseller" arrangement where there are 2 layers of margin or mark up. After all Optium is known for being pretty efficient financially and with suppliers / partners.

Sailboat.
Pete Baldwin
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Pete Baldwin,
User Rank: Light Beer
12/5/2012 | 3:40:38 PM
re: Finisar & Optium Challenge JDSU
From Harmon's Needham report today, the next largest optical components suppliers are:

Opnext: $266 million
Bookham: $239 million
Avanex: $198 million
Emcore (including Intel): $180 million
Oplink: $163 million

So ... anybody see any combination there that they like?
^Eagle^
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^Eagle^,
User Rank: Light Beer
12/5/2012 | 3:40:35 PM
re: Finisar & Optium Challenge JDSU
how's this for a trial ballon:

Opnext + Avanex. Little product overlap especially now that 3S Photonics has been spun out of Avanex.

Emcore + Oplink. again, complementary product lines. Little overlap and good overall widening of portfolio to address both passives, actives, core and edge, roadms, lasers, etc.

shoot bookham and put it out of it's misery. Sorry Bkhm. I had high hopes for you long ago...but now... well really haven't we discussed Bkhm to infinity and back on these boards.

maybe the other alternative for Bkhm is to merge with a Chinese company like IBM did with the laptops and Lenovo. Merge Bkhm with for instance WTD.

So, how is that for some test cases to get the discussion going? No analysis of financials, nor other metrics in this suggestion such as compatibility of management teams. Just simple product rationalization as well as scope and balance of customers and application space.

Sailboat.
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