In an ongoing plan to revamp its financial position, Corning Inc. (NYSE: GLW) is set to sell its Precision Lens division, which makes subsystems for displays like rear-projection televisions, to 3M Company (NYSE: MMM) for $850 million in cash (see 3M Buys Corning Business).

The deal is expected to close before the end of the year. 3M will name its acquisition the 3M Precision Lens division and maintain its current headquarters in Cincinnati. The 1,500 employees who worked for Corning will be transferred to 3M, according to a 3M spokeswoman.

Corning has been trying to avert a financial crisis, as its fortunes have been severely battered by the telecom downturn. The company’s trying to pick its spots by investing in parts of its business that aren’t dependent on carrier capex, such as the making of LCD glass for computer displays [ed. note: and, don't forget, lovely designer glassware]. It’s also trying to get as much cash as possible to combat debt.

Corning says it will use the cash to improve its battered financials. It also plans to pay $150 million outstanding for the year on its pension plan, allaying concerns raised by employees and analysts, at least for another year.

For its part, 3M seems thrilled to add yet another brick to its gradually growing optical business. Earlier this year, the company indicated its ongoing interest in expanding this business through acquisitions when it took a peek at some failed startup assets (see Component Cannibalism?).

And it looks as if 3M's getting a gem. First off, the lens division is part of Corning's Information Display business, which represents a bit less than one-third of Corning's net sales but is the only division that's grown significantly in recent months. According to Securities and Exchange Commission (SEC) filings, Precision Lens made up nearly 33 percent of Information Display earnings last quarter.

What's more, the lens business has been immune to the telecom downturn, thanks to its focus on the consumer market. Precision Lens helped Corning's figures last quarter, according to its SEC filing: "[Information Display Segment] net income in the third quarter increased 38% compared to the same period in 2001 primarily due to display technologies and precision lens... Sales in the precision lens business increased 32% and 21% in the third quarter and nine months of 2002 compared to the prior year periods..."

Why would Corning ditch such an asset? It smacks of desperation. Corning says it needs the cash. “We did this for financial, not strategic, reasons,” says a spokesman.

At least one analyst thinks Corning may live to regret acting for near-term gain. In a note today, analysts Max Schuetz and Jeff Loff of Credit Suisse First Boston Corp. say the deal will allay concerns about Corning’s near-term financial fitness... “However, Corning loses its best business."

Corning Precision Lens is still growing at 25 to 30 percent annually and features what Credit Suisse estimates as an EBITDA margin of 43 percent for calendar year 2002. What's more, even though Corning's turned the wolf from the door, it's gambling that prices will level out in the company's other businesses, enabling the profits to help fund the planned expansion of its LCD business in Taiwan. If things don't work out that way, the analysts say, "GLW may quickly find itself in need of cash once again... w/out $100M/y of precision lens contribution."

There are other concerns, too. With the sale of Precision Lens, Corning is losing capabilities to manufacture a range of optical designs, not just those associated with consumer displays. Precision Lens also has aerospace and telecom expertise. That may put the company at a disadvantage if demand increases in either of these arenas. This concern has been raised in terms of the sale of component manufacturing facilities by other companies, too (see Component Closures: Trouble Ahead?).

Despite these drawbacks, investors seem pleased -- for the moment, at least. Shares of Corning surged on the news, rising nearly 20 percent to trade at $2.58 early this afternoon. 3M shares also rose and were trading at $128.26, up $1.90 (1.50%) in the same timeframe.

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