The proposed merger of Avanex and Oplink has some shareholders worried. Are their reservations well founded?

August 5, 2002

5 Min Read
Avanex/Oplink Raises Some Hackles

The proposed merger of Avanex Corp. (Nasdaq: AVNX) and Oplink Communications Inc. (Nasdaq: OPLK) has some shareholders up in arms over happenings that took place after the merger was announced. And they're doing everything they can to stop the deal.

The two passive optical component companies announced their plans in March (see Avanex/Oplink Merger: Tip of the Iceberg?). The transaction, which has the full approval of both companies' boards, will be put to a shareholder vote August 15. Supporters hope closing will follow shortly thereafter, with each Oplink shareholder receiving 0.405344 of a share of Avanex common stock. The surviving entity will be named Avanex and be managed jointly by representatives of both companies.

Proponents say the merger is the best way to ensure the two companies survive the current optical downturn and position themselves for the expected resurgence of the components market.

But some shareholders plan to vote "no," and at least one contends that executives at Oplink are virtually being paid to support the merger, regardless of negative events that have occurred at Avanex since March.

Zhimin Liu, a founder and former CEO of Telelight Inc., a components company bought by Oplink in April 2000 for about $27 million, gives several reasons he doesn't want to put his 3-million-odd shares of Oplink on the line:

  • Resignation of CTO. Two months after the merger was announced, Avanex announced the appointment of Giovanni Barbarossa as CTO -- and the departure of Simon Cao, a founder and developer of the company's technology (see Avanex Promotes Barbarossa). Liu thinks the departure weakens the technology position of Avanex.

  • Big lawsuit. A lawsuit filed in California in May by a Taiwan company called Hon Hai Precision Industry Co. Ltd. accuses Avanex of breach of contract, fraud, and deceit regarding the terms of an exclusive manufacturing arrangement Avanex allegedly made with a company Hon Hai acquired. The upshot is that Hon Hai and a co-plaintiff are asking for $41.5 million, plus damages and attorneys' fees. Since the litigants base this amount on money they paid out, the suit may pose a genuine threat to Avanex.

  • Financial foibles. Both Avanex and Oplink are losing money, but Liu points out Oplink will shoulder the burden of carrying the combined company after the merger. Indeed, the prospectus that the two companies have issued and sent to the Securities and Exchange Commission (SEC) quote figures from UBS Warburg that show for the calendar year 2002 Oplink is expected to account for 59.2 percent of revenues and 77 percent of gross profit for the combined company.

    Quarterly revenues for the two companies are comparable. Avanex, which has restated its earnings for most of last year and part of this one (see Avanex Restates Earnings), recently announced quarterly revenues of $8 million and pro forma net loss of $0.16 per share (see Avanex Announces Q4 ). Net revenues for the year ended June 30, 2002, were $33.7 million, down $97.5 million from the same time last year. For its latest quarter, Oplink reported $7.7 million in revenues and a pro forma net loss of $0.03 per share.

Liu's concerned enough about these issues to have researched them and posted the results on a tersely named Website: http://www.nomerger.com. He claims to have been contacted by many shareholders. Three whose stake totals more than 40 million shares have vowed to vote against the merger as well, he says.

Both Oplink and Avanex managements have been aggressively seeking a positive shareholder vote. They've sent joint letters touting the merger. They've issued a press release publicizing the endorsement of a stockholder advisory firm (see ISS Supports Avanex/Oplink Merger).

If Oplink management had any reservations about the merger in light of recent developments, though, it would be difficult for them to say so at this point. They have a lot at stake, according to the merger prospectus filed with the SEC. For one thing, having voted in favor of the merger, directors and officers must endorse it publicly at the risk of a deal-breaking fine of $12 million.

Avanex's financial disclosures also indicate clearly that top managers have much to gain individually by sticking out the merger. Several execs are in line for retention bonuses. Some, like Oplink's CFO, have been given accelerated vesting options. Oplink directors also will be insured by the new Avanex against legal liability arising from their jobs for the next six years.

Two execs also have had terms of personal loans changed. Joseph Y. Liu, ex-CEO of Oplink who'll become co-chairman of the board after the merger, borrowed $10,068,751 from his company at different times in 2001, taking out three different promissory notes, each due five years from the issue date. New terms, drawn up March 18, extend the due date on the loans to 2007.

Frederick Fromm, current CEO of Oplink, borrowed $400,000 from the company in 2000. Now, instead of installments due in 2002 and 2004, Fromm has until 2007 to pay.

Avanex spokesman Tony Florence says this is a wrong interpretation of the promissory notes arrangement; but his company's lawyer does not dispute it.

Florence also says Zhimin Liu's claims point to nothing. Cao resigned for personal reasons, according to the Avanex press release. The $40 million lawsuit is "a spurious strike suit," Florence says, and will be vigorously opposed. "We intend to win."

And rumors of widespread shareholder opposition just aren't true. "The majority of our shareholders support the merger," says Florence. He says recent share activity supports this.

Indeed, records seem to support the view that Avanex shareholders are standing firm. But Oplink's are another matter. A major shareholder, Cisco Systems Investments, sold 1.5 million shares late in June, according to reports on Yahoo (Nasdaq: YHOO).

Most analysts say the two companies would be better off merging. "I tell Oplink shareholders that consolidation is the key to survival," says one Wall Street analyst, who asked not to be named. "Oplink won't survive without a merger." Despite the drawbacks, it's better to merge, he says.

"Both companies are in a world of hurt, so I view consolidation as anecessary, if desperate move," writes Michael Orsak of WorldView Technology Partners, in an email to Light Reading. Orsak says he was once an Oplink shareholder but isn't now. Orsak also says the objections of Liu may be overstated, even if they are "pretty well done."

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

Subscribe and receive the latest news from the industry.
Join 62,000+ members. Yes it's completely free.

You May Also Like