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Chairman and CTO Frank Levinson refutes a rumor that an acquisition by Emulex is in the works
January 20, 2003
Frank Levinson, chairman, founder, and CTO of Finisar Corp. (Nasdaq: FNSR) has denied a rumor that a possible acquisition by Emulex Corp. (NYSE: ELX) is in the works.
The rumor was triggered by a report that a team of auditors from Emulex spent the latter part of last week camped in Finisar's active components division in El Monte, Calif. This came from a consultant -- a previously reliable Light Reading source -- who went on to suggest that Emulex would soon make a bid for Finisar.
Finisar didn't respond to requests for comment on Friday, suggesting there was some truth to the story.
However, Levinson -- or someone claiming to be Levinson -- jumped into action in the early hours of Saturday morning, posting a message on the board following this story which began:
As Finisar's largest shareholder, CTO, Chairman and founder I can state categorically that there is no truth in this rumor. Emulex did not have any auditors at Finisar this week for any financial review. We are not in discussions with Emulex on any matters except normal vendor customer matters.
Click here to read the full message, and a subsequent message pointing out: "If you are going to lie to the press, you don't have the Chairman do it."
So, rumor duly squashed. However, it's worth examining why it sounded credible in the first place.
For a kickoff, it's thought that Emulex, which makes adapters for storage-area networking, has been looking for years to buy a transceiver outfit of its very own; and Finisar, which makes a range of datacom transceivers, fits the bill. The consultant that started the latest rumor says Emulex already passed on the chance to buy Stratos Lightwave Inc. (Nasdaq: STLWD) months ago. Now, with its eye on 10-Gbit/s Fibre Channel, Emulex could be readier than it's been in the past (see Xilinx, Emulex Create 10-Gig FC and Emulex Cooks Up 10-Gig FC Demo).
Finisar, however, wouldn't be a bargain to buy. It has a market cap of $289.8 million and $112 million in cash at the end of last quarter. Finisar also has about $125 million in debt. "They'd have an enterprise value of about $310 million -- that's what a company would have to pay to take them over," says one financial analyst, who also spoke on condition of anonymity.
Could Emulex have afforded it? Its last quarterly report boasted revenues of $70.4 million, up 34 percent year-over-year (see Emulex Q1 Profits Rise). And with about $322.2 million in cash on hand, the company certainly seems to be doing better than some in the industry.
Still, would such a buy have been wise? Some have their doubts. "The downturn has marked a profound change in the component business. Transceivers have become commoditized, everything's going to China," says the consultant quoted earlier. He says companies such as Finisar, Optical Communication Products Inc. (OCPI) (Nasdaq: OCPI), and Stratos Lightwave aren't going to be able to compete against the growing roster of resident Chinese, Taiwanese, and Korean competitors that make all kinds of transceivers at margins at least 20 percent lower than competitors elsewhere.
There are other problems. "Finisar spends a lot on R&D and their fixed overhead is very high," says the financial analyst quoted earlier. He says the company's roster of products, while cutting-edge, is very diverse and costly to support and develop.
— Mary Jander, Senior Editor, Light Reading
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