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