Finisar Buys Infineon Optics
Making a grab for market share, Finisar Corp. (Nasdaq: FNSR) announced today an agreement to buy the fiber optic business unit of Infineon Technologies AG (NYSE/Frankfurt: IFX) for stock worth $232 million.
The sale was forecasted by Light Reading in February, although Finisar wasn't identified as a potential buyer (see Infineon Spins Out Opto Group). The fiber optics business was "carved out" of Infineon earlier this month, becoming a separate legal entity, Finisar president and CEO Jerry Rawls told analysts in a conference call today.
The deal would bolster Finisar's product lineup and bring the company into some new markets, including the automotive industry. (It appears doubtful, however, that Finisar will inherit the naming rights to the former Sears Point Raceway -- now called the Infineon Raceway.)
Expected to close during the third calendar quarter of 2004, the deal has Finisar issuing 135 million shares of stock -- a 38 percent stake -- to Infineon, which would become Finisar's largest shareholder. Finisar would receive the fiber optic division with neither cash nor debt attached, and Thomas Seifert, the CEO of Infineon's wireline group, would join Finisar's board. (See Finisar to Buy Infineon Fiber Optics Biz.)
Investors reacted coolly to the deal. In after-hours trading Thursday night, Finisar's shares had fallen 9 cents, about 5 percent, to $1.72, making the deal worth about $232 million.
The deal has plenty of potential for Finisar, though, as the expanded company would contend with Agilent Technologies Inc. (NYSE: A) to become the largest pure-play optics supplier. The crown includes data-communications optics, which represent the bulk of both companies' sales. The top spots in optics would still be held by JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU), Avanex Corp. (Nasdaq: AVNX), and Bookham Technology plc (Nasdaq: BKHM; London: BHM).
Qualifiers aside, the deal "makes Finisar a force to be reckoned with in fiber optics," says John Harmon, an analyst with Needham & Co. "By becoming a larger manufacturer, they get some presence and some economies of scale."
Infineon's 1,200-employee fiber optic business posted about $32 million in revenues for the quarter ended March 31. Added to Finisar's expected fiber optics revenues of $48 million to $52 million for the quarter ending April 30, that puts the combined companies at a conservative $80 million per quarter, or a run rate of $240 million per year.
Based on figures from RHK Inc., that's enough to rival Agilent's industry-leading 15 percent market share, said Rawls (JDSU is right behind, with 14 percent).
Finisar and Infineon are already perceived as strong players in the optical transceiver market, according to a recent survey conducted by Heavy Reading, Light Reading's paid research division. In the survey, more than 300 buyers of optical components were asked to identify suppliers they considered market leaders in different markets. Finisar ranked third, and Infineon ranked fourth out of 28 suppliers in the transceiver marketplace. Both companies also placed highly in the market for lasers/detectors.
Table 1: Market Perception of Vendors' Strengths and Weaknesses
|Basic Passive Components||5th||No products|
|DWDM Components||5th||No products|
|Cables and Connectors||No products||No products|
|Optical Amplifiers||7th||No products|
|Optical Switches and ROADMs||No products||No products|
|Signal-Conditioning Components||5th||No products|
|Source: Heavy Reading 2004 Optical Components Market Perception Study|
Adding to the deal's attractiveness is the fact that only 8 percent of Infineon's fiber optic revenues overlap with Finisar's, according to Rawls. In part, that's because the companies are geographically disparate, with Finisar selling largely into North America and Infineon strongest in Europe and Asia. "We really do serve substantially different markets," he said.
The deal is going to take some work, though, which might explain the cool investor reaction. For starters, the Infineon division is still losing money, although Finisar executives wouldn't say how much.
Then there's the matter of consolidation. Finisar would have two transceiver manufacturing operations -- one in Germany and one in Malaysia. Chances are, one would have to shut down. Then there are the four semiconductor fabs Finisar would be acquiring: in Richardson, Texas; Fremont, Calif.; and Munich; and a 56 percent interest in Taiwanese foundry ParoLink Technologies Co. Ltd.
And making cuts won't be easy, with so many of Infineon's facilities located in labor-sensitive Europe. One wild card is Infineon's assembly and test plant in the Czech Republic. With that country joining the European Union on May 1, cutting headcount could be troublesome. "It won't be as insurmountable a feat as in Germany, but it'll be harder than in the U.S.," Needham's Harmon says.
Among the new product lines Infineon would bring to Finisar are modules for 10-Gbit/s Ethernet. Finisar chose to concentrate only on the XFP multisource agreement (MSA), a type of module expected to be a long-term favorite. Infineon would provide footing in two intermediate MSAs, the X2 and XPAK.
Other Infineon additions would include bidirectional transceivers, Gigabit Interface Controller (GBIC) transceivers, the Paroli line of parallel optics for backplanes, and 1310nm Vertical Cavity Surface Emitting Lasers (VCSELs). The latter would add to the VCSEL line Finisar acquired from Honeywell International Inc. (NYSE: HON) in March. (See VCSELs Revisit OFC and Finisar Takes On Agilent.)
But here's the most interesting twist: About 38 percent of Infineon's fiber business comes from the automotive industry. Car makers such as BMW are starting to use optics to transmit in-vehicle data, buying transceivers and plastic optical fiber from Infineon. It's a strange side market for Finisar but one that could grow by 15 to 25 percent per year as more manufacturers go optical, Rawls says.
— Craig Matsumoto, Senior Editor, and Peter Heywood, Founding Editor, Light Reading