Optical components

Optical Sector Awaits Finisar-JDSU Deal

Optical components firm Finisar said nothing on its fiscal second-quarter earnings call late last week to contradict the widely held belief that it could acquire JDSU's planned optical spin-off. However, such a deal may not come soon enough for some JDSU shareholders.

To be clear, Finisar Corp. (Nasdaq: FNSR) did not directly address the possibility of acquiring that spin-off when JDSU (Nasdaq: JDSU; Toronto: JDU) splits into two companies next year, but Finisar Chairman and Co-founder Jerry Rawls did say the sector needs to be consolidated.

"I think consolidation is a good thing because there are more companies in our industry right now than there need to be doing research and development on the same products," Rawls said. "The industry would benefit from having fewer competitors." He later added, "There's a lot of [M&A] activity going on in the space right now and we'll continue to evaluate it."

That update came the day before JDSU's annual shareholders meeting last Friday. In advance of that meeting, investor Sandell Asset Management had campaigned to fellow investors to vote against the re-election of JDSU board members Tom Waechter, who is the company's CEO, and Martin Kaplan, a former Pacific Bell senior network executive who has been on JDSU's board since 1997, through its tumultuous acquisition spree and later implosion, and currently heads the board of directors' governance committee. Sandell said JDSU should have pursued a sale of the optical division instead of a corporate split.

JDSU announced in September that it would split into two companies, one focusing largely on optical components and including JDSU's current Communications and Commercial Optical Products division, and the other focused on network service enablement. Almost immediately, industry analysts suggested Finisar as a likely eventual M&A partner for the optical spinoff when the corporate split is complete next year. JDSU officials have since admitted that there is nothing preventing them from selling either of its planned spin-offs before they are spun off. (See JDSU to Split in Two and JDSU Spin-Offs Look M&A-Ready.)

Sandell's disagreement with the split strategy fulminated in public last month when Sandell complained that JDSU did not give enough advance notice of the annual shareholders meeting date to allow investors to propose alternate candidates for board election. Sandell subsequently urged investors not to vote to re-elect Waechter and Kaplan.

JDSU issued a statement after Friday's meeting saying that all six board members up for re-election, including Waechter and Kaplan, were re-elected, and that no new proposals came forth at the meeting.

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Analysts still think a Finisar deal for JDSU's optics group is likely to happen, but it is not clear when. James Kisner, analyst with Jefferies, wrote in a research note, "Management commentary supports our belief that Finisar is likely to acquire JDSU's CCOP business, though we suspect that the deal will take longer to consummate than we previously anticipated."

— Dan O'Shea, Managing Editor, Light Reading

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