The planned merger of Avanex Corp. (Nasdaq: AVNX) and Oplink Communications Inc. (Nasdaq: OPLK) is off, and it looks as if Avanex has been left at the altar, with Wall Street by its side.

In late afternoon trading, Avanex shares had climbed 9.81 percent to $2.25, up $0.20. Shares of Oplink, in contrast, were trading at $0.77, down $0.02 (3.75%).

Some analysts had predicted that if the merger didn't clear, Oplink would lose most (see Avanex/Oplink Raises Some Hackles). But the negative outcome wasn't a complete surprise. The proposed Avanex takeover had become the focus of controversy in recent weeks, as top execs at both companies had campaigned vigorously to convince stakeholders of the benefits of merging -- even calling in consultants to help (see ISS Supports Avanex/Oplink Merger).

Some shareholders were unmoved by these efforts. One of these was Zhimin Liu, the retired CEO of Telelight Inc., a company bought by Oplink in 2000. "Oplink has a better chance without Avanex," said Liu earlier this month. He was so convinced of the danger of the merger that he started a Website to promote his views. (It's since been taken down, and he hasn't returned Light Reading's phone calls.)

Apparently, he wasn't alone. Although 98 percent of Avanex shareholders voted in favor of the merger yesterday, Oplink shareholders voted it down by an undisclosed majority.

Management of both companies is disappointed. "Paul Engle [Avanex CEO] and I... share frustration at not being able to complete what we're both thoroughly committed to," says Frederick Fromm, CEO of Oplink.

But it seems the two companies don't share exactly the same view of how the vote failed. Avanex blames "Taiwanese-based stockholders, who collectively own over 40 percent of Oplink's outstanding shares." Further, Avanex's press release says the vote was swayed by a big stake owned by "two major funds controlled by relatives of Oplink Chairman Joe Liu" (see Avanex/Oplink Merger Nixed).

How these investors are related to Liu, or why they would have voted against the merger, is a puzzle. Indeed, Liu was among the executives who stood to gain from the merger. Among other things, terms of over $10 million in outstanding loans he's taken from Oplink would have been changed in his favor.

Avanex isn't prepared to explain itself. When asked why the Taiwanese investors would have stuck together, "We really do not know. They interfaced with Oplink and it was not what we expected," writes Avanex spokesman Tony Florence in an email to Light Reading today.

Oplink's Fromm doesn't see it this way. "I'm not making comments on [Avanex's] analysis of our shareholder vote," he says, but he notes that Oplink has investors all over the world, not just in Taiwan. They failed to reach a majority consensus despite his best efforts to convince them otherwise.

A roster of beneficial ownership filed with the Securities and Exchange Commission (SEC) this past March shows a range of key stakeholders, including Oplink execs and three entities affiliated with U.S.-based Crescendo Ventures, which owns over 7.5 million shares, representing about 4 percent of outstanding Oplink common stock.

Several of Oplink's key investors are associated with InveStar Capital Inc., a Taiwan-based VC company with offices in the U.S. Three InveStar affiliates, as well as one of its managing partners, Herbert Chang, beneficially own over 26 million shares of Oplink common stock, more than 16 percent of the company.

Other investors include Chieh Chang, CEO of Programmable Microelectronics Corp., a non-volatile memory chip company based in Taiwan. Chang and his family own over 6 million shares of Oplink stock.

Both Changs sit on Oplink's board of directors.

Fromm acknowledges hearing that some key investors based in Taiwan weren't swayed by arguments for the merger. He thinks two key events that happened after the initial merger agreement put off these investors. These events included the recent resignation of Avanex's CTO, Simon Cao, and the emergence of a $41.5 million lawsuit filed in May by a Taiwan-based company named Hon Hai Precision Industry Co. Ltd., which claims Avanex reneged on an exclusive manufacturing contract.

Fromm says some of the Taiwanese investors were troubled because Hon Hai is well known in Asia, implying that its claims were serious ones that could present a challenge to Avanex to defend.

So what's next? Avanex says it's moving on. "Our focus going forward will be to... focus on high performance photonic processing modules, subsystems and technologies," says CEO Engle in today's prepared statement.

Oplink's Fromm is stoical. The optical components market is led by JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU), he says, with many small players competing for a distant number two market spot. The merger would have created a viable number two player.

Still, he remains optimistic. "We have $225 million in the bank," he asserts. And with a growing number of companies exiting the optical components space, there's a better chance for smaller fry (see Components Overboard! and Lights Out for Agere's Opto Biz).

Is there a chance Avanex and Oplink may try to tie the knot again? "There's always a possibility if parties agree," Fromm says.

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com