Optical/IP Networks

JDS Rumors Fly (and Crash)

Well, that was fun while it lasted. Shares of JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) and Alcatel SA (NYSE: ALA; Paris: CGEP:PA) closed down today after being chased up by yesterday's rumors of a merger -- rumors that analysts dismissed as ridiculous.

Tales of Alcatel wanting to acquire JDSU sent the component giant's shares up 11 percent yesterday. But today, the fire went out -- JDSU shares fell 35 cents to $5.38, while Alcatel shares dropped 23 cents to $16.90.

Still, this isn't the first or last rumor about JDSU that's made the circuit this year -- the year being only three weeks old. It seems something's up.

Earlier whispers had JDSU acquiring transceiver star Finisar Corp. (Nasdaq: FNSR). And a new rumor today had Avanex Corp. (Nasdaq: AVNX) losing some Nortel Networks Corp. (NYSE/Toronto: NT) business to JDSU. (Avanex did not immediately return a call for comment; a JDSU spokesman wouldn't comment on any of the rumors.)

"Something's happening at JDSU, which you'd expect with them having a new CEO [former Cisco exec Kevin Kennedy] wanting to do something and show 'em who's boss," says John Harmon, analyst with Needham & Co.. "And they also just raised $400 million [in zero-interest notes], which they've got to do something with." (See Kevin Kennedy Gets His Dream Job and JDS Prices $400M in Notes.)

JDSU had more than $1 billion in cash and short-term investments before raising the extra $400 million in October, so it's understandable that observers would be expecting something big to go down.

The Alcatel rumor, which appears to have made the rounds after being published by Reuters, sent JDSU shares up 56 cents per share, or 11 percent, to $5.73 yesterday. JDSU's trading volume yesterday was 183 million shares, compared to the stock's recent average volume of 37.6 million shares. The stock has exceeded volume of 80 million six times since Jan. 1.

The rumor didn't have legs, however -- maybe because it was just plain nuts. Think about it: Alcatel just went through a lot of trouble to drop its components division, Alcatel Optronics, by selling it to Avanex -- for small change -- in May 2003. Alcatel picked up 28 percent ownership in Avanex but also gave Avanex $110 million cash to help with restructuring costs, leading some to half-jokingly say Avanex was paid off to complete the deal. Understandably, Alcatel shares fell 18 cents to $17.13 on Nasdaq yesterday.

(The Alcatel sale was part of the same deal that saw Corning Inc. sell most of its photonics division to Avanex -- see Avanex to Buy Alcatel, Corning Units.)

Rumors aside, JDSU's stock is benefitting from the newfound optimism in telecom (see Chips on Their Shoulders). The stock is up 60 percent since Christmas Eve, when it closed at $3.36.

— Craig Matsumoto, Senior Editor, Light Reading

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