Finisar Stock Slide Kills Merger

Once again, "current market conditions" in the telecom industry have stymied Finisar Corp.'s (Nasdaq: FNSR) merger plans (see Finisar and BaySpec Nix Merger).

Late Wednesday, the components vendor called off its acquisition of BaySpec Inc., a manufacturer of bulk diffraction grating multiplexers, which it had agreed to purchase for stock worth $53 million when the deal was announced (see Finisar to Buy BaySpec ).

At that time (March 15), Finisar's shares were trading at $7.51. Today, Finisar opened at $3.00. Analysts say the reduced stock price made the deal less attractive to BaySpec.

"BaySpec obviously wanted more shares," Kevin Slocum, an analyst with Soundview Technology Group wrote in a research note issued yesterday. "Yet Finisar did not see strong enough near-term upside to their results to alter the number of shares it was willing to offer for BaySpec."

Finisar is having a bad case of déjà vu. In February 2001, it agreed to acquire Marlow Industries Inc., a manufacturer of thermo-electric coolers, for approximately $30 million in cash and $270 million in stock. Over the next few months Finisar got that sinking feeling and, in June, it called the whole thing off (see Finisar Ends Merger Plans).

According to a source close to the company, last year Finisar also tried to buy Tsunami Optics, a manufacturer of coarse Wavelength Division Multiplexing (WDM) modules, which was snapped up by Stratos Lightwave Inc. (Nasdaq: STLW) instead (see Stratos Buys Tsunami).

On the flip side of the coin, Finisar has seen plenty of successful deals in the past few years, including the purchases of Sensors Unlimited and Demeter Technologies (see Finisar Boosts Its Telecom Prospects). And it has taken advantage of the current market conditions to buy distressed assets, a strategy that Slocum views positively (see Finisar Buys (and Saves) AIFOtec).

Nevertheless, Finisar's current situation raises doubts about whether it can complete its other planned deals, says Slocum, namely its agreement to buy the passive optical components business of New Focus Inc. (Nasdaq: NUFO), which was announced on April 24 (see Finisar Buys New Focus Assets).

"We are in a perverse market," says Slocum. "Finisar is slammed because it sees pricing pressure in a market where investors expect competitive pricing, yet it is not rewarded for taking steps to control key cost components in its products that will allow it to be a low-cost supplier in the market."

Soundview rates Finisar a Buy, as does CIBC World Markets. "We would use the recent weakness to purchase the shares," writes CIBC analyst Jim Jungjohann.

— Pauline Rigby, Senior Editor, Light Reading
http://www.lightreading.com