MRV Sags on Fiberxon Buy

MRV Communications Inc. (Nasdaq: MRVC) stock sank this morning as the company revealed it has closed the Fiberxon Inc. acquisition even though the startup couldn't deliver fully audited financial reports.

MRV is acquiring Fiberxon for $131 million and merging it with LuminentOIC Inc. , MRV's optical transceiver subsidiary, with plans to take the combo public. (See MRV Buys Fiberxon, Preps IPO.) The acquisition was completed on July 1.

But in a Securities and Exchange Commission (SEC) filing today, MRV admits it hasn't been able to clear up questions around Fiberxon's books.

Investors don't like hearing things like that. MRV shares were down $0.36 (11%) at $2.89 in early afternoon trading on Monday.

In the SEC filing, MRV notes that allegations of "irregularities" in Fiberxon's 2004 and 2005 earnings had cropped up during due diligence. According to the filing, the irregularities led to the firing of CEO Li Hsu and Fiberxon's vice president of finance early this year and launched an internal Fiberxon investigation.

But Fiberxon's independent auditors weren't convinced. The filing says they ran into "serious issues" and "significant difficulties" during their audit, which "called into question the commitment of Fiberxon's management to maintain reliable financial reporting systems, including accounting books and records, in conformity with accounting principles generally accepted in the United States or PRC."

That's particularly bad news given that Fiberxon was already working behind its plan. Fiberxon reported 2006 revenues of $45 million to $48 million -- but company officials had been hoping to reach $60 million by 2005.

In the filing, MRV says it became convinced Fiberxon wouldn't be able to correct its financial statements by June 30 "or within any reasonable extension of that date," regardless of whether Fiberxon's management changed. With a deadline looming for the merger, MRV chose to charge ahead.

MRV's board unanimously waived the requirement for Fiberxon's audited financials. And MRV has taken over the process of restating Fiberxon's financials. As part of the amended deal, it appears Fiberxon shareholders won't get paid yet: Fiberxon agreed to "defer the practical realization of most of the consideration to be received by its stockholders from the Mergers" until its books are in SEC-approvable condition, the filing says.

Apparently, Fiberxon is that important to MRV. The Fiberxon-Luminent tag team could become a top seller of transceivers into PON systems. Moreover, Fiberxon would deliver a greater presence in China, someething MRV says it's been coveting.

MRV says in the filing that it believes Fiberxon's "fundamental business is sound."

MRV has until Sept. 14 to file Fiberxon's audited financial statements with the SEC. After that, MRV could start getting those nasty delisting warnings.

— Craig Matsumoto, West Coast Editor, Light Reading