"In our opinion, Finisar needs to buy Oclaro," writes analyst Mike Genovese, calling the hypothetical deal a "make-or-break proposition" for Finisar.
No such deal is rumored -- this is not a Nokia-Juniper kind of situation -- but Genovese, who follows the optical networking market for MKM Partners , thinks it's the best way to position Finisar Corp. (Nasdaq: FNSR) for the 400Gbit/s generation.
He wrote his opinion in a research note published Monday, and the topic is sure to come up when Finisar announces its earnings on Thursday.
Merger-spotting has been a popular sport in optical transceiver circles for years; in fact, Oclaro itself came from the combination of Avanex and Bookham. Speculation about Finisar and Oclaro is nothing new either, as analyst James Kisner of Jeffries & Co. floated the idea last year. Finisar has been hypothetically linked to competitor Lumentum Holdings Inc. as well. (See Will Finisar Bid to Buy Oclaro? and Lumentum Looks to Be a Buyer.)
A Finisar-Oclaro deal would be expensive, at least in relative terms, considering these are two of the biggest independent players in optical components. Oclaro Inc. (Nasdaq: OCLR) had a market capitalization of $1.2 billion as of Tuesday. Finisar's market cap was $2 billion.
Both trail Lumentum, which has a market cap of $2.9 billion.
Genovese theorizes that Finisar would pay $1.7 billion to grab Oclaro, possibly in a combination of cash and stock, although he runs through some scenarios involving debt financing too.
The "why" of the deal comes down to lasers. Specifically, electro-absorption modulated lasers (EMLs) are a "vastly superior" option for 400Gbit/s networking, Genovese writes -- and Finisar has no such product in-house. Oclaro does.
"We expect the 400-Gbit/s Datacom cycle to take off in 2019. Finisar derives more than 70% of its sales from Datacom end markets and risks losing its strong market position if it does not add EMLs," Genovese writes.
A side effect would be that Oclaro's CEO, Greg Dougherty, could take charge of the combined company, Genovese writes. Finisar CEO Jerry Rawls has announced he'll retire at the end of 2018. (See Finisar CEO Rawls to Retire.)
— Craig Matsumoto, Editor-in-Chief, Light Reading