Optical/IP Networks

Components Overboard!

A couple of years ago, everyone wanted to get into the optical components business. Now vendors can't exit it fast enough.

Witness a string of announcements today, all involving large companies throwing components divisions overboard:

  • ADC Telecommunications Inc. (Nasdaq: ADCT) said it will exit optical components by the end of its next financial quarter, ending on October 31, 2002 . The company hopes to sell its businesses in pump lasers, tunable lasers, and passives by that time, and it has retained Lehman Brothers to market those businesses aggressively. If it can't sell them, the subsidiaries will simply be shut down (see ADC Selling Components Biz).

  • JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) announced the planned sale of its Cronos MEMS (micro-electro-mechanical system) foundry -- originally purchased with stock worth $549 million -- to French MEMS specialist Memscap S.A. (Euronext: MEMS). The proposed stock deal should be worth about US$9.3 million (see Memscap to Buy JDSU's Cronos).

  • The U.K.'s Bookham Technology PLC (Nasdaq: BKHM; London: BHM) announced that it is selling its majority holding in Measurement Microsystems A-Z Inc., a developer of digital signal processing solutions, back to the company's former management (see Bookham Divests Interest in MM and Bookham to Acquire Signaling Startup).

This latest news is just the tip of the iceberg. There are plenty of other recent examples of vendors fleeing the components business: In May, New Focus Inc. (Nasdaq: NUFO) sold its passive components group to Finisar Corp. (Nasdaq: FNSR) and its tunable laser division to Intel Corp. (Nasdaq: INTC), thus returning its focus to test and measurement (see Intel Buys New Focus Laser Division).

Clearly, optical components is one of the toughest markets to be in right now. For one thing, demand is down: "There is still a tremendous amount of oversupply," says Rob Clark, public relations spokesman for ADC, referring to the excess components inventory that is still being worked through by many of the company's customers.

Indeed, it looks as if inventories are a key problem industrywide. A recent report from Optical Oracle, Light Reading's paid subscription service, notes that for leading public component suppliers, the ratio of inventory levels to the cost of goods sold -- a useful measure of true inventory levels that takes changing prices into account -- started rising again in the last few quarters (see Components Crunch Time). This is the opposite of what the industry needs.

The trend among optical vendors to jettison components subsidiaries started before the recent downturn, as some big companies perceived that a components division could realize more value as a standalone entity. This was the case when Lucent Technologies Inc. (NYSE: LU) decided to spin off Agere Systems (NYSE: AGR). Now, though, market pressures have systems vendors desperate to cut costs, ready to sell the units outright to the highest bidder.

The big question is, if everybody is selling, who is buying? The market is literally flooded with components opportunities right now, and even the king of consolidators -- JDS Uniphase -- has started throwing things out, as today's announcement shows.

It could be especially tough for companies that already have experienced problems with their components businesses. ADC's tunable laser division in Sweden had already been put on notice of possible sale or closure prior to this week, for instance (see ADC Tunes Out). Rumor has it that the subsidiary's tunable lasers weren't making the shortlists at systems houses.

At least one analyst thinks ADC shouldn't have gotten into components in the first place. "I'm glad to see they've come to their senses," quips James Jungjohann of CIBC World Markets.

He says ADC's sizeable connector business could generate the most interest. Word has it that Amphenol Interconnect Products Corp. is looking to buy something in this line, he says. Corning Inc. (NYSE: GLW), however, is also reported to be trying to sell its connector business and could beat ADC to a potential deal with Amphenol.

"Everything is up for sale," says Jungjohann, "I wouldn't put [ADC] on top of anyone's list."

— Pauline Rigby, Senior Editor, Light Reading

Editor's Note: Light Reading is not affiliated with Oracle Corporation.

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