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Oclaro & Opnext Strive for Scale

Craig Matsumoto
News Analysis
Craig Matsumoto
3/27/2012
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A primary motivation for Oclaro Inc. (Nasdaq: OCLR) and Opnext Inc. (Nasdaq: OPXT) to merge, a move they announced late Monday, is to create a company big enough to stand a long-term chance of supplying major customers.

That should sound familiar, because it's the rationale that was behind the 2009 merger of Avanex and Bookham that created Oclaro.

That was a long-awaited event that many people worried would drown both companies, considering each had had trouble cutting costs and making any profits. Oclaro and Opnext are both expected to report losses for the next few quarters, but the companies apparently believe their combined scale is necessary.

Oclaro and Opnext overlap in relatively few product areas, so it's not a case of saving money by making massive cuts. Rather, the deal is about setting up prospects for the future, says analyst Karen Liu of Ovum Ltd.

"I don't think they were endangered" before announcing the merger, she says. "But I think the ability to grow was limited."

A wider scope would also give equipment vendors a better reason to consider Oclaro/Opnext a critical supplier.

"When we merged Bookham and Avanex, we became a Tier 1 supplier to our customers," Oclaro CEO Alain Couder said on Monday afternoon's conference call with analysts. "Now it's going to be even more [so], because we are going to have all the core technology needed" for future developments, he said.

The deal would also put the combined company on a more level footing with Finisar Corp. (Nasdaq: FNSR) and JDSU (Nasdaq: JDSU; Toronto: JDU), in terms of revenues.

Table 1: Optical Components Revenues

Company Revenues, past four reported quarters (in millions)
Finisar $949.6
JDSU $755.2
Oclaro+Opnext $744.7
Oclaro alone $417.2
Opnext alone $327.5
Source: Yahoo Finance, Seeking Alpha


A point worth noting at this juncture: Oclaro and Opnext, combined, would have overtaken JDSU by now in terms of annual revenues, were it not for the 2011 floods in Thailand, Oclaro Chief Marketing Officer Yves LeMaitre tells Light Reading. Opnext's production at contract manufacturer Fabrinet Co. Ltd. (NYSE:FN) was hurt more than most by that natural disaster. (See Optical Industry Adjusting After Thai Floods.)

Indirectly, the combined company would be going on the offense against smaller suppliers, blocking them from joining the Tier 1 club.

"The customer will only work with the smaller guy if they cannot get what they want from the top three," LeMaitre says. "There are companies -- I don't want to give names -- with one cool product or two cool products, and they're really struggling to get to the next level. With this merger, we make it almost impossible."

One area where Oclaro and Opnext would save some money is in development of 40Gbit/s and 100Gbit/s modules -- something both companies were working on. (See Oclaro Joins Opnext at 100G.)

Both companies also plan to move test and assembly to lower-cost venues. Oclaro has been moving those functions to a contract manufacturer in Malaysia, taking them out of Oclaro-owned facilities in Zurich and in Shenzhen, China. Similarly, the Opnext test and assembly facilities in Japan and California could be moved to a more cost-efficient location in the Asia/Pacific region. (See Oclaro Preps Malaysian Move.)

The combined company would hang onto its five semiconductor fabs, though, he said. That points to the trend of vertical integration that's been happening in optics, with all of the remaining large companies owning fabs. In particular, the opportunities to reduce costs in optical modules are likely to come from inventions at the chip level, Couder said.

— Craig Matsumoto, Managing Editor, Light Reading

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gtchavan
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gtchavan,
User Rank: Light Beer
12/5/2012 | 5:38:05 PM
re: Oclaro & Opnext Strive for Scale
At least from their own perspective optical sector is undervalued.
Chhilar
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Chhilar,
User Rank: Light Beer
12/5/2012 | 5:38:03 PM
re: Oclaro & Opnext Strive for Scale


 "There are companies -- I don't want to give names -- with one cool product or two cool products, and they're really struggling to get to the next level. With this merger, we make it almost impossible."


 


The merger makes it impossible for some of their customers to get to the next level?  That doesn't sound like a positive thing at all.

Pete Baldwin
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Pete Baldwin,
User Rank: Light Beer
12/5/2012 | 5:38:02 PM
re: Oclaro & Opnext Strive for Scale


RGru -- sorry for leaving that unclear; he's talking about his competitors, not his customers.

4mTx
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4mTx,
User Rank: Light Beer
12/5/2012 | 5:38:00 PM
re: Oclaro & Opnext Strive for Scale


Apart from the big question of profitabilty of the merged entity, what do you think they are going to call themselves? Any ideas Craig :)?

Balet
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Balet,
User Rank: Light Beer
12/5/2012 | 5:37:59 PM
re: Oclaro & Opnext Strive for Scale


I wonder which smaller competitors would they block?


Finisar, JDSU, Opnclaro - who else is left, who might embark on so broad area of optical components across the board?


There are plenty of 1-2 product's companies for their market; then ever slow NEL...Then, whole China...


Anybody else?

Balet
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Balet,
User Rank: Light Beer
12/5/2012 | 5:37:58 PM
re: Oclaro & Opnext Strive for Scale


Craig,


Thanks. Then, you can add Enablence too?


IMHO, Emcore and Neo fell into the same traps of having predominately Chinese engineers and manufacturing. Everything must be "cheap", innovation levels are low. Using high quality materials? "They are not cheap!".


I believe the strength of the top three component makers comes from investing into new technologies and products and keeping enough designers in the western world.

Pete Baldwin
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Pete Baldwin,
User Rank: Light Beer
12/5/2012 | 5:37:58 PM
re: Oclaro & Opnext Strive for Scale


Balet -- I think it's the onesey-twosey companies he was referring to. Maybe also the next-tier players, like Emcore and even NeoPhotonics.

Pete Baldwin
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Pete Baldwin,
User Rank: Light Beer
12/5/2012 | 5:37:58 PM
re: Oclaro & Opnext Strive for Scale


> Apart from the big question of profitabilty of the merged entity, what do you think they are going to call themselves?


I like Balet's idea of Opnclaro. :)


Realistically, I think they'll just stick with "Oclaro." It's really an acquisition, just one where the acquired party retains a very strong voice in the merged company.


(Actually, Bookham/Avanex was also an acquisition, but I think they wanted to change the branding to shed the bad times of the preceding 7 or 8 years. Just a guess.)


Chhilar
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Chhilar,
User Rank: Light Beer
12/5/2012 | 5:37:57 PM
re: Oclaro & Opnext Strive for Scale


Thank you for the clarification.  That makes sense now.

redface
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redface,
User Rank: Light Beer
12/5/2012 | 5:37:55 PM
re: Oclaro & Opnext Strive for Scale


"Anybody else?"


 


How about Coadna, Optoplex, Bayspec, Dicon Fiberoptics, Capella, Lightwaves 2020, AC Photonics, etc.  There are still quite a number of smaller players other than the big three.

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