OCP Pops a Poison Pill

Optical Communication Products Inc. (OCP) (Nasdaq: OCPI) announced a temporary shareholder rights plan today to rebuff a takeover effort launched by Oplink Communications Inc. (Nasdaq: OPLK). (See OCP Adopts Plan.)

Struggle for control of OCP began early last week, when Oplink announced it had reached an agreement to purchase a 58.2 percent stake in the company owned by Furukawa Electric Co. Ltd. , for $99 million, or $1.50 per share. Oplink also extended an unsolicited offer to acquire the remaining 41.8 percent of OCP for $1.50 per share. (See Oplink Buys OCP Stake and Oplink: We're Down With OCP.)

Oplink held a conference call to announce the Furukawa deal and its intent to purchase the remaining stake in OCP, but did not invite anyone from OCP to the party. One source, who wished to remain anonymous, says that's because OCP was essentially blindsided by the news and didn't hear about the Furukawa deal until the morning it was made public.

After not being consulted on the takeover proposal, OCP announced a special committee of independent directors to review the offer. (See OCP Announces Special Committee.)

OCP says it enacted the shareholder rights plan to slow the takeover process and to give the special committee more time to review Oplink's proposal.

In a letter to OCP shareholders, chairman Hobart Birmingham wrote that "the mandate of the Special Committee is to determine whether the Oplink proposal is in the best interests of the company's Class A common shareholders," and that the purpose of the rights plan was to interject "a thoughtful pause that it believes can only benefit the evaluative process."

Under the shareholder rights plan, OCP has declared a dividend distribution of one right for each outstanding share of OCP common stock to shareholders of record as of May 14, 2007.

Shareholder rights become exercisable under three conditions: the closing of Oplink's purchase of Furukawa's stake; the acquisition of more than 15 percent of OCP's outstanding common stock by a third party; or the acquisition of any additional shares by Furukawa or Oplink. According to OCP's public statement, these rights expire on June 2, 2007.

If any of those conditions takes place, the plan would essentially double the number of outstanding common shares owned by minority stakeholders, making it prohibitively expensive for Oplink to merge the companies.

Although OCP says the poison pill was enacted to protect shareholders, analysts say the plan could also serve to defeat any potential takeover by Oplink.

In a research note issued this morning, Needham & Co. analyst John Harmon says he believes the rights plan makes "the acquisition onerously difficult, effectively killing it."

With the poison pill in place, questions remain over whether Oplink will even continue to pursue Furukawa's majority stake. Without full ownership of OCP, the deal probably doesn't make financial sense. In a telephone conversation, Harmon said that "Oplink would need to own all of OCP to realize the cost benefit from integrating the two businesses. Being an investor in OCP isn't quite enough."

Furthermore, the existence of the poison pill gives Oplink an out. One of the conditions listed in the Furukawa deal that could affect its close was a shareholder rights plan. Section 7.2 of the purchase agreement states, "The Company shall not have adopted a shareholder rights plan or so-called 'poison pill' that would be triggered by Purchaser's acquisition of the Shares at Closing pursuant to this Agreement." So Oplink could back out at any time.

If the company chose to do so, it wouldn't be the first time Oplink terminated a purchase agreement. CEO Joe Liu has walked away from acquisitions before, most recently his company's planned merger with components maker EZconn Corp. That deal was nixed due to "unfavorable market conditions" just months after it was announced. (See Oplink Cancels EZconn Deal and Oplink Goes for the EZconn.)

Oplink's most notorious non-deal, however, was probably its proposed merger with Avanex Corp. (Nasdaq: AVNX), which died after a shareholder revolt that Avanex claimed was led by Liu's relatives. (See Avanex and Oplink: Wedding's Off and Avanex/Oplink Raises Some Hackles.)

While the end result of the takeover proposal is unclear, the board room drama will almost surely continue. As Harmon wrote in his most recent research note on the subject, "this is unlikely to be the last move in this chess game."

— Ryan Lawler, Reporter, Light Reading