More optical component consolidation is underway, as Continuum Photonics Inc. and Polatis Ltd., two startups building optical switches, agreed to a merger on Friday (see Polatis, Continuum Merge).

Terms aren't being disclosed, although some details might come out when the deal closes in a couple of weeks, says Aaron Bent, vice president of marketing at Continuum.

For now, Bent notes that the combined companies will have a good cash position. Polatis, based in Cambridge, U.K., raised $9.4 million in November, while Billerica, Mass.-based Continuum picked up $17.5 million in April 2004 (see Polatis Closes $9.4M and Continuum Closes $17.5M Round).

The companies will be getting more cash from their combined investors, a pool that includes Boston Millennia Partners, Flagship Ventures, Gainesborough LLC,Harris & Harris Group, JK&B Capital, andPrism Venture Partners on Continuum's side; and 3i Group plc, Alta Berkeley Venture Partners, EonTech Ventures SA, and Prelude Trust plc on Polatis's side.

Prelude has already said it's put £613,000 (US$1.08 million) more into Polatis and will own 19.7 percent of the merged company (see Prelude Ups Polatis Investment).

It's the second optical merger to come around in a week. Integrated-optics firms ASIP and T-Networks agreed to a merger last Tuesday, adopting the combined name Apogee Photonics Inc. (see ASIP, T-Networks Reach Apogee). That merger, too, came with an extra investment from the companies' investors.

Continuum and Polatis build all-optical switches using a piezo-electric beam-steering technology, as opposed to the MEMS devices from most startups in this space. The concept of all-optical switching got big publicity around 2000 when companies were discussing 1000x1000 crossconnects, but most companies in the space -- including these two -- have honed their focus to the more practical 2x2 and 1x2 kinds of devices (see All-Optical Still Kicking and Nortel Buys a Monster Crossconnect).

Why combine two companies with such similar technology? Most observers agree the optical components market remains overcrowded with startups. Some players believe it's best to winnow the field so that prices can inflate a little."Rather than beat each other up in the industry, we can combine operations," Bent says.

One application the merged company might pursue is a means of testing passive optical networks (PONs) that doesn't involve armies of technicians out to test the lines. "We're looking pretty seriously at changing the way people look at testing for fiber to the home," Bent says. The companies aren't giving many details, considering this is a hypothetical product direction, and PON equipment vendors contacted for this story didn't seem to think much improvement was needed. For example, Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) claims it's got a means of testing PON lines from the central office already.

A more immediate application for the combined company would be in wavelength management for reconfigurable optical add/drop multiplexers (ROADMs), an area Polatis was already exploring (see Polatis Plugs On With Optical Switches). The companies might have such a product announcement ready for the European Conference on Optical Communication (ECOC) in September, Bent says.

Polatis was founded in 2000 by Andrew Dames, then of Sentec Ltd., and has raised roughly $21 million in three rounds. Continuum was founded in 1998 by Massachusetts Institute of Technology (MIT) alumni and has raised $36.5 million in equity and debt.

— Craig Matsumoto, Senior Editor, Light Reading