Corning Expands Components Empire

Corning Inc. (NYSE: GLW) has announced it will spend $3.6 billion to buy 90 percent of the optical components and devices business of Pirelli S.p.A. The other 10 percent of the business will continue to be held by present stakeholder Cisco Systems Inc. (Nasdaq: CSCO).

The transaction is slated to close within 2 to 3 months, Corning says, and will be logged as a purchase by the end of the fourth quarter of 2000. Corning plans to finance the deal with a combination of about two-thirds common equity and one-third convertible debt. According to CFO James B. Flaws, the buy will result in 3 to 4 percent dilution of pro forma earnings per share in 2001.

The Pirelli plants being bought as part of the deal are located in Italy and will stay there, Corning says. It plans to grow the staff of 310 there to 440 by year's end.

In a conference call early today, Corning spokespeople said the deal will help the company broaden its scope of products. "We want to be the world's leading optical-layer company," said Gerald J. Fine, VP of Corning's Photonics Technologies division. Executives highlighted three chief benefits of the acquisition:

First, Corning hopes to expand its capacity for making specialty fiber, a market in which it is desperately trying to fill orders. "Frankly, we need specialty fiber capacity for customers right now," said Fine. Pirelli's European location also will boost this strategy.

Second, it plans to use Pirelli's ability to manufacture lithium niobate modulators for a new line of high-speed optical transmission components. Lithium niobate, sources say, supports greater distances and data rates in optical components compared to materials like silicon germanium. Corning says the market for lithium niobate modulators is growing by more than 80 percent annually and will be a $2 billion market by 2005.

Third, Corning hopes to grow its ability to make submarine components, including submarine pump lasers, chips and packaged modules. This market is growing at 60 percent yearly, Corning says, and will be $2.3 billion by 2005.

While executives stressed the gains from this buy, it's also clear that Corning will have some work to do on its end. For one thing, Corning admitted in response to analysts' questions today that Pirelli's components division is not profitable. It has just two customers, Cisco and Pirelli, which plan to remain on the roster. And its technology isn't up to speed in some areas. For example, the power levels in Pirelli's pump lasers are slightly below the levels required by today's market, say Corning officials. It will take about 12 months to bring them up to speed.

Also, the lithium niobate modulators in Pirelli's line support 10-Gbit/s data rates, and Corning says it's going to be "awhile" before 40-Gbit/s rates can be supported. Meantime, archrival Lucent Technologies Inc. (NYSE: LU) reportedly demonstrated a 40-Gbit/s lithium niobate receiver at a recent conference (see Lucent Demos 40-Gig Optical Receiver).

Still, Corning seems pumped on its plans. The deal's terms are better than those that allegedly brought down Corning's earlier plans to buy the optical components group of Nortel Networks Corp. (NYSE/Toronto: NT) (see Nortel/Corning: Components Paranoia Grows and Corning and Nortel End Discussions). And executives said in today's call that the acquired division will be profitable within 2001, with a major ramp up in productivity and financials by 2002.

Corning's stock price closed at $325 yesterday. Shares are slated to split October 3.

-- by Mary Jander, senior editor, Light Reading http://www.lightreading.com