Avanex Deal Reshapes Sector
After announcing plans to purchase the optical components businesses of Alcatel SA (NYSE: ALA; Paris: CGEP:PA) and Corning Inc. (NYSE: GLW) on Monday, Avanex's stock rose $1.74 to $2.93. But late today, the stock was down 22 cents.
The reason seems clear: Avanex has taken the last good spot available in the optical components sector.
Analysts and industry executives agree that a broad product line will be required for success once the segment recovers (date unclear). The fastest way to get a broad product line is through acquisition, and the Alcatel and Corning units were the last sizable components units up for sale.
In previous deals, Bookham Technology plc (Nasdaq: BKHM; London: BHM) and TriQuint Semiconductor Inc. (Nasdaq: TQNT) acquired the components groups of Nortel Networks Corp. (NYSE/Toronto: NT) and Agere Systems (NYSE: AGR.A), respectively (see Bookham Buys Nortel's Components Biz and TriQuint to Acquire Agere's Optics).
The consolidation resulting from Avanex's deal should be good for all survivors.
"Competition-wise, Avanex is offering something that would represent more competition than three separate companies," says Pat Chiefalo, analyst with Merrill Lynch & Co. Inc.. "On the other hand, the fact that you're having a less fragmented industry overall means you have better industry characteristics. Pricing competition is not as bad, and rational pricing is good overall for the industry."
The resulting landscape has JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) at the top, with Avanex and Bookham duking it out for second place. "That's a good battle," Chiefalo says.
Avanex does still have to finish its whale-swallowing act to make the deal successful, though. In addition to its own restructuring, the company has to navigate some cuts in the Alcatel business as well as integrate the Alcatel operations and Corning assets into its own fold -- not the kind of chore that gets done in a day or two.
"You're looking at a year or two years out before you start to see inroads into the industry," Chiefalo says.
After the Avanex deal was announced, other photonic component stocks rose, too: New Focus Inc. (Nasdaq: NUFO) rose 6 cents to $3.49; Oplink Communications Inc. (Nasdaq: OPLK) climbed 10 cents to $1.20; and shares of JDSU rose 4 cents to $3.41. But many of those gains were given back in trading today.
— Craig Matsumoto, Senior Editor, Light Reading