OFS Drags Down Furukawa

TOKYO -- Not long ago, Light Reading asked its readers: Did Furukawa Buy a Lucent Lemon? We just got the answer.

Furukawa Electric Co. Ltd., Japan's premier maker of fiber optic cable, just posted a loss of ¥3.4 billion (about US$27.1 million) for the fiscal year ended March 31, 2002, compared to a ¥167 billion yen profit ($1.3 billion) the year before. The culprit? The Optical Fiber Solutions (OFS) group it bought from Lucent Technologies Inc. (NYSE: LU) for a hefty $2.3 billion in November 2001 (see Lucent Cuts Deal on Fiber Unit).

According to the company’s post-mortem to analysts at the Tokyo Imperial Hotel today, OFS has already cost Furukawa Electric $243 million in exceptional expenses, even though it's been on the company's books for just short of four months. Charges have included $31 million in retirement expenses and $148 million in various restructuring costs as the company axed 47 percent of OFS’s employees from November 2001 through April 2002 in an attempt to trim its new purchase’s sails. In the process, Furukawa's stock lost a third of its value.

Furukawa president and CEO Junnosuke Furukawa told about 200 analysts today he anticipates that OFS will be the key contributor to a record loss for Furukawa Electric for the upcoming fiscal year.

"I guess we paid a little too much [for OFS]," he admitted.

Afterward, he said the bottoming out of the long-haul market was mainly to blame for OFS not panning out as planned. "I still think I made the right decision, but the timing wasn't so good," Furukawa told Light Reading after his presentation. "I've told people that nobody could have forecast such a big crisis in the market."

Furukawa Electric's recovery strategy involves taking the company to break-even on an operating income basis at the $900 million level and moving into profitability sometime in 2003.

To do this, the firm will cut at least another 500 staff at OFS, taking the headcount down below 3,000 this year. It also will slash overall fiber optic capital expenditure to $60 million from the $150 million originally planned. And it will temporarily shutter several plants and dump some surplus plants from its roster.

President Furukawa declined to disclose which plants might be closed, and the company’s PR department won't speculate. But Furukawa made it clear further cuts will affect OFS. "The axe is going to fall heaviest on Norcross," he said. (OFS is headquartered in Norcross, Ga.)

Furukawa Electric also plans to join the rush to attack the metro and access markets, expanding sales of its AllWave cabling products, the president said, while ramping high-performance optical fiber based on its TrueWave and UltraWave lines.

Above all, Furukawa is banking on some sort of recovery in 2003. “If metro comes along, long haul will follow,” said the CEO.

Some analysts question Furukawa's strategy, saying the company focuses too much on high-quality premium products that may not make it in the metro market. They're also concerned that the company may need to do even more than it's already outlined to cut costs, particularly if plant utilization falls below 50 percent, as some suspect it of doing now.

“Just cutting some workers is not going to be enough,” says Atsushi Yamaguchi, senior analyst at the J.P. Morgan Securities Asia branch of J.P. Morgan Chase Bank & Co.

"Optical is a capital intensive industry, and a large part of Furukawa's cash is affected by equipment costs," Yamaguchi maintains. "They need to write off or stop some plants. They're not like JDS Uniphase Corp. [Nasdaq: JDSU; Toronto: JDU]. If you produce passives, you just lay people off to save money. But in Furukawa’s business, fiber, you have to shut down capacity." In spite of everything, though, President Furukawa made it clear today that he does not rue the purchase of OFS:

“As I said before, we had to buy because otherwise we would not have the possibility to expand our fiber business. With the deal, we got key licenses and intellectual property. Now we have a free hand."

Indeed, the logic behind Furukawa's OFS buy seemed compelling at the time. First, Furukawa got strong R&D and a swath of 900 U.S. and 2,000 worldwide patents, plus 50 cream-of-the-crop ex-Bell Labs researchers. What's more, buying OFS would give Furukawa Electric 26 percent of the fiber optic supplier market and the muscle to compete with heavyweight Corning Inc. (NYSE: GLW)

At the time of the OFS purchase, Junnosuke Furukawa called the deal the opportunity of the century. At last week’s May 20 financial results announcement he called the present market downturn a once-in-a-century disaster. Still, today he said he believes the long-haul market has hit bottom:

“The collapse of the American IT bubble hit us directly. It can’t get worse than this."

— Paul Kallender, special to Light Reading
http://www.lightreading.com