Mergers & acquisitions

JDSU: Less from More

JDS Uniphase Inc.’s (Nasdaq: JDSU; Toronto: JDU) management team reduced guidance yesterday afternoon, as the company announced the completion of its long awaited $13.5 billion merger with SDL Inc. (Nasdaq: SDLI) and completion of the $3 billion sale of its Zurich facility to Nortel Networks Corp. (NYSE/Toronto: NT) (see JDSU and SDLI Delay Merger, Again and Nortel Buys JDSU Plant for $2.5B).

Company executives said that the combined company would earn only 17 cents a share in the quarter on sales of $1 billion, excluding the Zurich facility. First Call estimates have been estimating earnings of 21 cents a share for the first quarter. As a result, several analysts from UBS Warburg to Salomon Smith Barney followed suit and reduced their target share prices from $75 a share to around $55 or $60. Most analysts held their previous rating, with a few like SG Cowen lowering it to a Buy from a Strong Buy.

JDSU attributed the guidance reduction to a continuing lack of visibility in the components market, spurred by stockpiled inventory at some of its larger customers coupled with capital spending concerns across the telecom equipment sector.

But some analysts aren’t too surprised by the change.

“They admitted earlier that their previous guidance was a stretch,” says Joseph Wolf, an analyst with UBS Warburg. “It’s harder to see what the quarter will look like on January 25 than three weeks later on February 13.”

The news hasn’t seemed to rattle investors too badly. Even though the stock has been heavily traded today, its price has held steadily at around $38 a share, dipping less than one percent from its close yesterday.

In a note sent to investors this morning, Mark Langley, an analyst with Epoch Partners attributes this to the fact that many investors had already priced a more pessimistic outlook into the stock due to earlier concerns.

“We believe that JDS Uniphase shares are undervalued at current levels,” he writes. “And that long-term investors will be well served in holding the shares.”

While most analysts have fallen over themselves to praise the merits of the merger, which they say puts JDSU in a good position to combat rivals like Corning Inc. (NYSE: GLW), there are some who see potential downsides.

For example, Epoch's Langley writes that the merger, which dragged on for nearly eight months, distracted JDSU from running its day-to-day business as it tried to deal with lawyers, Department of Justice filings, and postponed shareholder meetings. It also prevented the company from pursuing other large acquisitions. Secondly, the sale of the Zurich plant to Nortel not only put a key asset in a competitor’s hands but also diluted earnings per share (EPS) by approximately $0.04 for the quarter, he writes. And thirdly, he says, the company will likely face issues as it tries to integrate sales teams, operations, and product lines while also retaining key employees.

But overall, analysts are positive about the merger. “In the short term, this is a rough spot for the whole industry,” says Wolf of UBS Warburg. “That said, the optical networking story is still strong in the longer term and JDSU is well positioned.”

The new company will be split into two business groups. Don Scifres, president and CEO of SDL, will head up the new Amplification and Transmission Business Group with help from Greg Dougherty, chief operating office of SDL, who will continue that role for JDSU. Jay Abbe, president and chief operating officer of JDSU, will take the lead for the WDM, Switching, and Thin Film Products Business Group. And Jozef Straus will continue as cochairman and CEO of the combined company.

-- Marguerite Reardon, senior editor, Light Reading http://www.lightreading.com

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