JDSU, SDL Face Further Grilling

The word on the street is that the Department of Justice is close to issuing a second request for information on the $41-billion megamerger being proposed by JDS Uniphase Corp. (Nasdaq: JDSU) and SDL Inc. (Nasdaq: SDLI) (see JDSU/SDL: A Component Powerhouse).

It’s hardly surprising that the government wants to look more deeply into the matter. After all, it is the biggest technology merger ever, and there’s a serious risk that the combined entity could monopolize the market for 980-nanometer-wavelength pumped lasers – a component used in a wide range of optical equipment. This risk arises from vertical integration. SDL is one of the largest suppliers of this type of laser, and JDSU is one of largest suppliers of the chips used to build them. Together, they would exercise enormous power over the whole supply chain, from raw components to the packaged products bought by equipment manufacturers.

This threatens to make life difficult for other manufacturers of pumped lasers like Nortel Networks Corp. (NYSE, TSE: NT), Lucent Technologies Inc. (NYSE: LU), and Corning Inc. (NYSE: GLW), all of which buy some of their pumped laser chips from JDSU.

“I think the concern is that the subcomponent vendors will be dependent on supplies from their competitor,” says John Lively, senior analyst in the optical component division of RHK Inc., the market research consultancy. “That can put them at risk if there is a capacity shortfall. Who gets the bulk of the capacity? Who gets better pricing? When you’ve got one player controlling the market, it makes negotiations difficult.”

Ultimately, this problem could be reflected in higher-than-necessary prices of pumped lasers and the equipment that incorporates them.

This issue of vertical integration is different from the one that held up JDSU’s previous merger with E-Tek Dynamics for several months while it was reviewed by the DOJ. In that case, both companies manufactured thin film filters used in DWDM (dense wavelength-division multiplexing) gear (see JDSU and E-TEK: The Omens Are Good ). They didn’t already dominate different segments of the supply chain.

Right now, it’s tough to tell whether the threat of JDSU and SDL monopolizing the pumped laser market will be enough to persuade the government to block the merger. Some industry sources say that JDSU’s close relationship with key people in the DOJ, following its previous mergers, will help it win the day.

Confidence seems to be growing among investors that the deal will go through. SDL’s shareprice has risen significantly in the past few weeks, from a low of about $320 to $401 at yesterday’s close. JDSU’s stock has crept up at a much slower pace, closing yesterday at $123.

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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