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Optical components

JDSU Buys E2O

What's this... JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) is back in the acquisition business? Yes, indeed!

Continuing the consolidation in the optical transceiver world, JDSU has acquired privately held transceiver vendor E2O Communications Inc. for roughly $60 million (see JDSU Buys E2O ).

The deal, announced yesterday, comes on the heels of Finisar Corp.'s (Nasdaq: FNSR) planned acquisition of the Infineon Technologies AG (NYSE/Frankfurt: IFX) optics group, which is expected to close in the third quarter (see Finisar Buys Infineon Optics). By adding E2O, JDSU gains some muscle against Finisar and Agilent Technologies Inc. (NYSE: A) in data communications transceivers. "This is JDSU making themselves relevant in that corner," says Dennis Gallagher, analyst with Schwab Soundview Capital Markets.

JDSU paid $60 million in cash for the six-year-old Southern California company, which employs more than 500 and runs manufacturing plants in Singapore and Indonesia. E2O CEO H.C. Lee (try saying that five times fast) has been named vice president in charge of JDSU's datacom business unit.

The acquisition boosts JDSU's standing in the data communications market, augmenting the company's datacom unit based in Rochester, Minn. (see JDSU's Bid for the Enterprise). E2O adds a few products that JDSU didn't have, such as transceivers for the Escon protocol. JDSU also benefits from seven new customers E2O brings, including storage networking vendor McData Corp. (Nasdaq: MCDTA)

Other E2O products include XFP modules for 10-Gbit/s Ethernet and Fibre Channel modules at speeds from 1 Gbit/s to 4 Gbit/s. E2O also developed 1310nm Vertical Cavity Surface Emitting Lasers (VCSELs) that might have piqued JDSU's interest, although Lee says technology wasn't JDSU's top priority in the deal.

The two companies were already collaborating on future transceiver products, but Lee wouldn't give any details, noting this was a "very small" factor in closing the deal.

JDSU was probably in the running for the Infineon purchase, but the smaller E2O makes for a "cleaner" deal, as the company isn't as large a fish to swallow, says Schwab Soundview's Gallagher. E2O's revenues exceed $5 million per quarter, according to JDSU's announcement; Gallagher figures the actual figure is around $7 million.

Considering the combined datacom and telecom transceiver markets, this acquisition probably puts JDSU among the top three, alongside Agilent and the Finisar/Infineon combination, Gallagher says. Because few companies spell out their transceiver revenues, it's difficult to figure an exact ranking.

Just behind them would be ExceLight Communications Inc., which Gallagher figures for $13 million per quarter in transceiver sales, and Optical Communication Products Inc. (OCPI) (Nasdaq: OCPI), which is projecting $12 million to $14 million in revenues for its June quarter, although that figure includes non-transceiver products and is actually down from the previous quarter (see OCPI Narrows Q2 Loss).

E2O marks JDSU's first acquisition of a whole company since the $19.4 million pickup of L.A. Label in January 2003. That business was folded into the Thin Film Product Group, the half of JDSU that doesn't apply to communications. JDSU has kept cautious about acquisitions ever since its acquisition binge leading up to 2001, when the company took tens of billions of dollars in writeoffs (see JDSU's Acquisition Hangover and JDSU Writes Off Billions More).

— Craig Matsumoto, Senior Editor, Light Reading

BlueWater66 12/5/2012 | 1:46:13 AM
re: JDSU Buys E2O That seems like a really expensive acquisition. At 3x revenue, and paying in cash, that is much richer than any other deal around.

I thought the "market" was below 2x revenue, in mostly unregistered stock.

As a side note, given the low optical component stock prices today, an "all stock" transaction might be a great deal. Nortel and Lucent are dragging down the optical component sectors. But the lastest analyst reports play down the real business impact of these investigations. I don't think either company will be re-stating anything significant ... especially their cash position or long term viability.

Any, congrad's H.C. I know a number of people at E2O and they've worked hard. As I remember, most of the founders are from the Motorola team that developed the OptoBus... so they've had a few failures in the past. I suspect they are seeing some sort of reasonable carve-out or maybe even return on their options. It is nice to see a small win in the component space.
whyiswhy 12/5/2012 | 1:46:07 AM
re: JDSU Buys E2O E2O expensive? JDSU is a 7x-PS-play! JDSU must have judged that E2O would be at least as good, or they would not have gone for the deal. The amazing thing is E2O's investors settled for so little. If they had been able/willing to hang in for only another year, it would have paid off much better. What was the paid-in, anyone know?

As with Blue, hope the founders/employees got a bit of a carveout. I would only add any exit in this "perfect" storm is a success. Congrats!

-Why
DarkWriting 12/5/2012 | 1:46:06 AM
re: JDSU Buys E2O These companies are all running out of cash. This was probably a good deal for E2O at this point. As with the others, I can only hope that more than just the executives get a share for their hard work out of this deal. Might have been better to have been a stock deal for the little guys. At least they could exchange some questionable options for a stock that has some long term potential. An all cash deal could still leave many of the options under water.

DW
PhGeek 12/5/2012 | 1:45:52 AM
re: JDSU Buys E2O I'm surprised that JDSU, through their acquisition of the ex-IBM folks in Rochester, Minn., didn't already have an Escon product (as purported by the purporter, um, I mean, reporter on this article).

Anybody out their with insights?

++PhGeek
desikar 12/5/2012 | 1:45:50 AM
re: JDSU Buys E2O Good point, PhGeek, esp. given that ESCON was developed by IBM!

-desikar

---------------------
PhGeek wrote:
I'm surprised that JDSU, through their acquisition of the ex-IBM folks in Rochester, Minn., didn't already have an Escon product (as purported by the purporter, um, I mean, reporter on this article).
SIVROCX 12/5/2012 | 1:45:44 AM
re: JDSU Buys E2O The group from Rochester were not even connected to the folks in Poughkeepsie that designed ESCON. I doubt very much that there is any working design level knowledge about ESCON from the Rochester group. +£
DarkWriting 12/5/2012 | 1:45:43 AM
re: JDSU Buys E2O Stratos has hired a firm to look into selling off the company. See my earlier post about Picolight and Stratos under the press release rather than this Light Reading story. Did I have insider information? Absolutely not, it is just a logical extension of what has been happening in this industry. These guys all have cash flow problems and not the critical mass to make a go of it. Who's next? The comments on E2O and Tyco(Amp) on the other board are also right on the money (SIVROCX). There are some real sweethearts in this industry.

DW


Mr. Mutt 12/5/2012 | 1:42:10 AM
re: JDSU Buys E2O I think the VC investment was over $100M, and that's cause E2O has their own manufacturing plant in Singapore and is very well run. They're also one of the stronger players in the FC market, with McData, Dell, and others as customers.

A great deal for JDS, and I agree that E2O should have held out for more $$$. With 7-8M/qtr in revenue, I'm sure they were close to break even if not profitable already.
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