Optical/IP Networks

Great Dane Aims for Best in Show

GN Great Nordic, the Danish parent of GN Nettest, yesterday put up $1 billion in cash and stock to buy Photonetics SA, in a move that highlights a burgeoning submarket in optical networking: test equipment for optical components.

GN Nettest makes scopes and analyzers that test the quality of fiber and ensure the parts used to make DWDM (dense wavelength-division multiplexing) gear will work at the right frequencies and power measurements. And Photonetics makes tunable lasers that can be used to measure and calibrate the channels in DWDM gear.

According to GN Great Nordic, it's a market that will grow from about $1 billion today to reach $7 billion over the next twelve months. And the vendor says the combination of GN Nettest and Photonetics will take a sizeable share of this emerging segment.

GN Great Nordic plans to take the new, improved GN Nettest public during the first half of 2001. Apparently, it's a popular plan: Shares of GN Great Nordic rose from about 1,040 Danish Kroner (US$122.60) Monday to close at a price of about DKK 1,179 ($139) today on the Copenhagen Stock Exchange .

A glance at some other numbers, however, shows that GN Great Nordic's clearly banking on the future, not the present. GN Nettest now earns about $210 million annually from sales of its optical testers, which it says are growing at a rate of 50 percent yearly. Photonetics makes about $18 million from tunable lasers that are used in optical test equipment, and gives its growth rate as 66 percent.

Analysts back up GN Great Nordic's hopes for growth. According to Jay Liebowitz, director of optical components at RHK Inc., revenues in the optical components market are beating all estimates -- and taking test gear along with them. "The market for components is taking off, and there's going to be a need for lots of test equipment and devices in labs," he says. His new forecasts for the optical component market won't be public for several weeks, he says, but he notes that the figures will be "much greater" than his former estimates of $10 billion by the end of 2000 and $23 billion by 2003. Sales of optical test gear, he says, are likely to reflect the increase.

Other sources also back up GN Great Nordic's big plans. "The strategic fit here seems to be very strong," says Michael Clemens, an analyst with investment bank Carnegie Denmark. He says GN Nettest will benefit from the expansion of its product line, while Photonetics can use its new parent's international marketing infrastructure to pump up revenues.

The two companies also will create a formidable customer base. Together, they already sell to Alcatel SA (NYSE: ALA), Avanex Corp. (Nasdaq: AVNX), Cisco Systems Inc. (Nasdaq: CSCO), Corning Inc. (NYSE: GLW), Hitachi Ltd. (NYSE: HIT; Paris: PHA), JDS Uniphase Inc. (Nasdaq: JDSU), Lucent Technologies Inc. (NYSE: LU), and Nortel Networks Corp. (NYSE/Toronto: NT).

But there are challenges too. The market for optical test equipment, including component test gear, is filling up with sizeable competitors, including Anritsu, Agilent Technologies Inc. (NYSE: A), Exfo (Nasdaq: EXFO), and Acterna, the company created by the May 2000 merger of test equipment makers Wavetek Wandel Goltermann and TTC. Competition's also heating up in tunable lasers, where vendors like New Focus Inc. (Nasdaq: NUFO) have already made a splash (see New Focus (Nasdaq: NUFO)).

GN Nettest's plans to expand into the components market also presents another problem: At some point, current customers such as JDSU may turn against buying from a potential competitor. According to RHK, this isn't such a big problem now, when components are in short supply, but a couple of years down the road, as vendors may decide to expand their product lines, it could have a negative effect on companies like GN Nettest.

For now, though, all systems are "go." "We'll be keeping everybody on everywhere and expanding like hell," says a GN Great Nordic spokesperson. The acquisition is slated to close within two months.

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

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