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Hitachi Plans Component Spinoff

Light Reading
News Analysis
Light Reading
9/20/2000

Hitachi Ltd. (NYSE: HIT) is creating a new U.S.-based company out of its optical components division, which makes Sonet/SDH laser diode modules, transmitters, and receivers.

Hitachi is the latest of several big companies to create separate entities from their component divisions. Lucent Technologies Inc. (NYSE: LU) and Nortel Networks Corp. (NYSE/Toronto: NT) plan similar spinoffs, and Alcatel SA (NYSE: ALA) has started a special tracking stock for its optical components. (See Alcatel to Issue Optical Tracking Stock and Lucent Names CEO for Spinoff and Alcatel Prepares for a Components War ).

Hitachi's startup, named OpNext Inc., is scheduled to open at an undisclosed U.S. location in January 2001. Hitachi's existing Fiber Optic Components Business Unit, located in Yokohama City, will become OpNext Japan Inc., the manufacturing subsidiary of OpNext. All 300-odd employees in Japan will be transferred to the OpNext, and about 50 more new hires will be made in the U.S.

OpNext "will consider" an IPO, spokespeople say, but no date's been set.

The spinoff is a smart move for Hitachi, according to analysts. "Everyone's talking about starting an optical components group. It's a high-growth, high-profit business," says Rick Schafer, analyst at CIBC World Markets.

Component vendors, he says, typically trade at higher multiples of earnings than do other vendors in the networking space -- making it easier for them to raise capital quickly, particularly for mergers and acquisitions.

Does this mean investors should buy Hitachi stock now in the hopes of making a back-door killing when OpNext goes public? There's no rush, says Schafer. He suggests waiting until OpNext's well established before heading for the back door.

Other analysts agree a back-door investment is chancy. "This move is a positive one for Hitachi, but I wouldn't advise any back-door investing," says David Takata, senior VP of research at finance company Gerard Klauer Mattison. "One investment doesn't signify that Hitachi's getting rid of its baggage." That baggage, Takata says, includes being a huge, diverse conglomerate that's only just catching on to the need for new business models and management styles.

While Hitachi plans to take a majority stake in the new company (sum undisclosed), it's also relying on outside investment from a joint partnership of Clarity Partners, a U.S. venture capital firm, and Marubeni Group, a trading and investment conglomerate based in Japan. Together, Clarity and Mirubeni have pledged up to $450 million to the project -- on a 50/50 basis.

A mix of Hitachi and Clarity executives will be taking the helm at OpNext, including David Lee, a managing partner at Clarity and a former cofounder of Global Crossing Ltd. (Nasdaq: GBLX). Lee will serve as cochairman.

In an interesting twist, Clarity Partners is the firm that just hired Harry L. Bosco, former group president of Lucent's optical networking group, who left Lucent in July (see Bosco To Go?). Although Bosco won't start with Clarity until October, spokespeople say "he will be involved with all of our portfolio companies," including OpNext.

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

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