JDSU Grooms Tiny Acquisitions

Yesterday's $12 million acquisition of Advanced Digital Optics Inc. (ADO) is one of several small startup deals that could emerge for JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) during the rest of the year, officials say.

What's spurring the deal is the fact that ADO, a design house, helped JDSU three years ago with new products for the projection-TV industry. JDSU is now buying the design team -- about half of ADO's 14 employees -- and taking the next-generation products in-house.

And JDSU plans more deals along those lines. "You're going to see a number of fortification moves across the entire product line," says Enzo Signore, JDSU director of product marketing. "Typically they are fairly small in terms of number of people and in terms of cash, and they are all aimed at fortifying our core competencies."

Even the $60 million acquisition of E2O Communications Inc. in May could be considered a "fortifying" buy, as the companies had been developing products together. E2O officials have previously noted that it wasn't the driving factor in the deal, however (see JDSU Buys E2O).

JDSU is hardly the first company to use this strategy. Intel Corp. (Nasdaq: INTC) invests in companies through its venture capital arm and occasionally snatches one up. Cisco Systems Inc. (Nasdaq: CSCO) took the idea even further with a set of spin-ins, startups created for the purpose of eventual acquisition (see Cisco Buys Andiamo Finally).

But the strategy is becoming more attractive for companies that had cut R&D during the downturn. For JDSU, the numbers are still going down: The company spent 14.4 percent of its revenues on R&D for its fourth quarter, which ended June 30, compared with 19.9 percent for the same quarter a year ago.

Plenty of communications companies "don't really have the R&D in terms of revenues to really get the best technology," says Chris Dzurinko, analyst with American Technology Research. "It would not surprise me, especially when you're talking optical, to see some of these smaller acquisitions of people you were related to or who just did a little work for you."

In the case of ADO, JDSU had been trying to shift its offerings in rear-projection TVs. Having sold components into the market since the mid-80s as JDS Fitel, the company wanted to move into light engines -- a change analogous to selling subsystems rather than components -- and enlisted ADO's help three years ago.

While the company doesn't specify revenues for its projection-TV products, analysts consider it an important, high-margin piece of its Commercial and Consumer Products segment. That division comprises 50 percent of JDSU's revenues -- the other half being in communications -- and consists of projection-TV parts, optical components for commerical markets, and variable pigments used on cars and U.S. currency.

— Craig Matsumoto, Senior Editor, Light Reading

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Stevery 12/5/2012 | 1:23:50 AM
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