Optical components

Legal Battle Drags Down Oplink

Oplink Communications Inc. (Nasdaq: OPLK)'s planned acquisition of Optical Communication Products Inc. (OCP) (Nasdaq: OCPI) continues to sour, and an escalating legal battle has led at least one analyst to downgrade the optical components manufacturer.

In a research note with the headline "OCP Acquisition Turns Hostile, Potentially Costly and Distracting," Merriman Curhan Ford & Co. analyst Tim Savageaux downgraded Oplink from Neutral to Sell today.

But that might be the least of Oplink's problems.

On Wednesday, OCP filed a legal response to an Oplink suit challenging a shareholder rights plan, or poison pill, initiated by OCP last week. (See Oplink Challenges OCP, OCP Pops a Poison Pill, and OCP Adopts Plan.)

The filing seeks to deny Oplink's request for expedited proceedings and the option to complete its acquisition of a 58 percent stake in OCP that is owned by Furukawa Electric Co. Ltd. before a Special Committee of OCP board members has an opportunity to review the deal. (See OCP Announces Special Committee.)

Defending its decision to adopt the poison pill in the filing, the company pointed out that the shareholder rights plan, which expires on June 2, does not interfere with Oplink's ability to close the Furukawa sale by its drop-dead deadline of July 31.

Needham & Co. analyst John Harmon said that, ultimately, "OCP can't stop Oplink from buying Furukawa's share." As a result, he believes the poison pill "was intended to slow the offer and give OCP enough time to review the deal."

OCP's filing paints an unflattering portrait of Oplink's acquisition strategy, which apparently did not include consulting the board before issuing an offer to minority shareholders. According to OCP's filing, "Until they received Oplink's [offer] letter, the members of the Special Committee were unaware that any transaction between Furukawa and Oplink was being discussed."

OCP also claims that Oplink sought to put pressure on minority shareholders by closing the deal for Furukawa's majority stake before it could be reviewed by OCP's Special Committee. The filing says that before the Committee could begin the process of evaluating the Oplink proposal, it "learned that Oplink and Furukawa sought accelerated regulatory approval of the Furukawa Sale, and intended to close the transaction immediately upon receipt of antitrust clearance."

Even if Oplink were able to complete the acquisition, analysts question whether the deal will be worth it. Due to the escalating legal struggle between the companies, Savageaux writes in his note today that the most likely outcome is "a higher price for the 42 percent of OCP that Oplink does not already own as well as a potentially distracted management team and significant legal costs."

One analyst, who asked not to be named, said he thought Oplink opportunistically used a depressed stock price to make an offer. However, he says "Oplink might not be willing to complete the transaction" if OCP demands a price more reflective of its value after restructuring.

Savageaux believes "the preferred outcome from our perspective of the OCP situation would be to unwind the entire transaction."

"The notion of having to spend an extra $20M+ to secure the stake is not an appetizing one from our perspective, nor is the notion of a hostile takeover on an entity that is supposed to provide synergies," he writes.

Oplink shares closed down $0.49 (2.75%) to $17.30 today.

— Ryan Lawler, Reporter, Light Reading

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