Finisar Buys Into Optical Amplifiers

Finisar Corp. (Nasdaq: FNSR) said that it will get technology to power the next generation of optical amplifiers with a $23.7 million acquisition of Red-C Optical Networks Ltd. Under the terms of the deal, announced Tuesday morning, Finisar will pay an initial sum of $23.7 million in cash for Red-C. Finisar will also pay "stockholders and certain Red-C employees" up to $20 million extra if unspecified financial performance targets related to Red-C products during calendar year 2013 are achieved.

Red-C provides erbium-doped fiber amplifiers (EDFAs), Raman amplifiers and optical monitoring devices for long-haul, regional, metro and access networks. The company, which is incorporated in Delaware but has operations in Tel Aviv, has 140 employees.

The deal is expected to close by July 31.

Why this matters
This could help Finisar counter the vertical integration of JDSU (Nasdaq: JDSU; Toronto: JDU). One of JDSU's strengths is its ability to combine multiple line cards into one -- putting a ROADM together with an EDFA and optical channel monitors, for instance. (See OFC: JDSU & Superblade! and Finisar vs JDSU.)

"We generally view this acquisition as consistent with Finisar's strategy of vertical integration," writes analyst James Kisner at Jefferies & Co. Inc. in a note published Tuesday. "We expect this acquisition could make Finisar more competitive with JDSU in the ROADM line card space."

Red-C, which has been around since the dawn of Light Reading, also brings a long-haul amplifier business that Finisar doesn't have, along with some future prospects. Red-C thinks its Hybrid Raman-EDFA platform can replace plain EDFAs in future long-haul and ultra-long-haul networks.

— Dan Jones, Site Editor, Light Reading Mobile

Balet 12/5/2012 | 5:28:39 PM
re: Finisar Buys Into Optical Amplifiers

While Finisar is in trouble itself with no clear road back to revenues raise...

^Eagle^ 12/5/2012 | 5:28:38 PM
re: Finisar Buys Into Optical Amplifiers

That is why the purchase was mostly cash.  If Red-C's investors had believed in Fins business plan and story about the future, they would have taken Fin stock and waited for the stock to rise.

According to this article, it was a cash deal.  

It is not clear to me if Fin is in any worse shape than others in optical components.  They have revenue, large market share and positive margins (barely positive, but still they are margins....).  So, if you were going to bet on one of the big companies to merge with, Fin is about as good as any of them.  

Of course this circles back to my first point.  the Red-C investors must not have been too thrilled with the idea of a purchase paid for by stock, hence the cash deal.

I cannot recall how much Red-C raised from their investors, so not sure how good a return, if any, this is.

Hopefully the rank and file employees got something out of this in return for all the hard work building the company.  I hear good things about Red-C.   

Interesting that Fin bought another Israeli based company.


Balet 12/5/2012 | 5:28:38 PM
re: Finisar Buys Into Optical Amplifiers

I agree on all points.

A few years back, I almost took a consulting asignment with Red-C. Nice people, but some of them left too early.

Not sure if employees will benefit much based on some other .IL acquisitions in this space I have observed.

I am also not sure if vertical integration is a right way to go in this space. The article example, JDSU's F.O. business, is not doing too well as we all know.

lightmonkey 12/5/2012 | 5:28:37 PM
re: Finisar Buys Into Optical Amplifiers

Finisar doesn't have a very good acquisition history.  Anyone remember Sensors Unlimited?  Sorry but $20M plus another $20M in bonuses for an EDFA company that nobody ever heard of strikes me as high.  I can't imagine this company has much in the way of revenue and even a 1x revenue price for this company strikes me as high. 

As far as I can tell there's really no interesting IP.  I guess they have Raman.  Wow.  I'd be surprised if they can offer an EDFA at a competitive price.

In addition to the remote site headache, undoubtablely FNSR will bear the burden of transfering whatever production to Ipoh.  Undoubtably that'll mean whatever products this company has will have to be redesigned for better margins.  Additionally, with Finisar's customer base, I doubt that they will have the BW to support all the customization that EDFA's require.  So that means more headcount to support the customization.  Also, it's not exactly Finisar's forte to offer anything in the way of a highly customized product like an EDFA.  So there's going to have to be pretty big change in the way they manage this one (assuming they have any customers at all for it). 

So from where I sit there's quite a bit of hidden cost in this little "gem" of an acquistition.  For the guys at this company (I already forgot the name), they hit the jackpot.  Good for you guys!

Balet 12/5/2012 | 5:28:37 PM
re: Finisar Buys Into Optical Amplifiers


Finisar might save some margins on amplifiers but get en extra headache of managing another remote location.

As to Cisco, I still remember 2002+ Cisco optical component empty buildings all over, some of them later leased by some of the people we discuss here.

I am still not sure if vertical integration is the way to go in optical module/component's world. How deep should they integrate? Can they really produce some stuff more cost efficient than sub-component/component vendors?

Pete Baldwin 12/5/2012 | 5:28:37 PM
re: Finisar Buys Into Optical Amplifiers

> I am also not sure if vertical integration is a right way to go in this space. The article example, JDSU's F.O. business, is not doing too well as we all know

You might be right, but vertical integration is certainly the direction the components industry is thinking in.

It's seen as a way to get better margins out of their products and take advantage of breadth.

I think there's also the shadow of systems vendors looming -- Cisco + Lightwire will certainly take a nibble out of the total available market for optical components. Component/module players might have to vertically integrate in order to prove they still have some worth.

Balet 12/5/2012 | 5:28:36 PM
re: Finisar Buys Into Optical Amplifiers

I respectfully disagree. Australian acquisition of Engana was one the best things, which happened to Optium/Finisar.

My concern is mainly with the timing and the target, even Red-C is a good profitable company on it's own. It will be a pretty easy cultural fit too.

jayja 12/5/2012 | 5:28:28 PM
re: Finisar Buys Into Optical Amplifiers




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