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Optical components

Newport Still Believes in Fiber

The coming $300 million acquisition of Spectra-Physics Inc. signals that Newport Corp. (Nasdaq: NEWP) is getting ready to double its revenues and take on a profitable mass of lasers and photonics -- almost none of it related to telecom. But that doesn't mean Newport is giving up on the telecom market.

Its fiber optics division -- which develops automated manufacturing and test machines for optical modules and components -- is still alive and won't be going anywhere after the acquisition, officials say.

"We still have roughly $2 million per quarter of equipment sales," says Robert Deuster, chairman and CEO of Newport. "We're not investing aggressively, but we intend to stay close to that market."

Founded in 1961, Spectra-Physics has gone through a few different owners over the years, ending up with Thermo Electron Corp. (NYSE: TMO) in 2002. Last month, Newport -- itself an oldie, founded in 1969 -- announced it would acquire Spectra-Physics from Thermo Electron for $200 million in cash, $50 million in stock, and a $50 million promissory note (see Newport to Acquire Spectra-Physics).

Expected to close this month, the acquisition is an integration play. Newport's products include manufacturing equipment that could incorporate Spectra-Physics lasers. Moreover, Newport and Spectra-Physics share a 60 percent overlap in customers, Newport officials say, but almost no overlap in actual products.

(Editor's Note: This Newport is not the same as Newport Networks Ltd., which sells session controllers for the VOIP market.)

Spectra-Physics had sold 980nm pump lasers into telecom, but the downturn drove the company away. Telecom inventories led Spectra-Physics to a $53.3 million restructuring in 2001, according to SEC documents.

Newport was likewise stung by its foray into telecom. Having made a name selling manufacturing equipment for the semiconductor industry, the company tried turning those automation techniques towards photonics, where the assembly of optical modules was still done mostly by hand, preventing mass production from blossoming.

Of course, the business soured. The company ended up cutting about 250 of its 1,400 employees in 2002, citing the troubled fiber optics market (see Newport Plans Cuts).

But Newport hasn't given up the fiber optic dream yet. In May, the company joined the Optical Society of America and the International Society for Optical Engineering (SPIE) in lobbying Congress for more photonics R&D funding (see Newport Stumps for Optical R&D). And Deuster sees ways Spectra-Physics could help the fiber optics unit. Its high-powered laser diode knowledge would help further the development of Newport's assembly equipment, he says.

Of course, Newport could also use its own equipment to assemble Spectra-Physics devices -- but that doesn't mean Newport would revive Spectra-Physics' telecom business. "We do not plan to be a components supplier to the telecom market," Deuster says.

Analysts overall are bullish on the acquisition, which would more than double Newport's revenues, to $105 million per quarter, by Newport's estimate. Newport officials say the acquisition will be accretive and could generate $40 million in extra cash flow during 2005 and give the companies extra power selling into the chip sector. "This acquisition makes a lot of sense on the semiconductor side," says analyst Abdul Q. Saleh of Ehrenkrantz King Nussbaum Inc.

Newport is profitable, having reported net income of $1.1 million, or 3 cents per share, on revenues of $42.4 million for its first quarter ended April 3.

— Craig Matsumoto, Senior Editor, Light Reading
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