Eitan Gertel, CEO, Finisar

At long last, a deal is done. With Finisar Corp. (Nasdaq: FNSR) snapping up Optium Corp. (Nasdaq: OPTM) late last month -- technically, it's being called a merger -- the optical components space gets some consolidation that creates an entity bigger than the JDSU (Nasdaq: JDSU; Toronto: JDU) optical operation. (See Finisar & Optium Challenge JDSU.)

It's the kind of merger that the struggling, oversupplied industry has awaited for years. Now it's up to the companies' chief executives to make sure they make a difference.

Eitan Gertel, CEO of Optium, will be running the ship alongside Finisar's chairman and former CEO Jerry Rawls -- a sign that, while the corporate brain center remains in California, much of the responsibility and the glory will still be at Optium's Pennsylvania site.

Between Gertel's and Light Reading's schedules, we managed to sneak in just a few minutes to grill the new CEO about the new company. Many of the answers were vague, stressing the usual harmony that's found in the days following an acquisition -- but admittedly, it's a bit early to tell just how the new, bigger company can make its mark.

Light Reading sit-downs with Rawls had been a regular occurrence, but this time, he was on a plane headed to an investor conference. So, Rawls wasn't around for this Q&A, but we did get to speak with him on camera at OFC/NFOEC:

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Now back to the subject at hand... Eitan Gertel. Read on for his insights on sharing his job and splitting R&D.

— Craig Matsumoto, West Coast Editor, Light Reading

{column} Light Reading: You're the CEO now, and Jerry Rawls is chairman, but it sounds like we're supposed to consider you guys to be running the show together.

Gertel: Two-in-a-box.

LR: Right. Well, I keep thinking back to the "merger of equals" concept, like SynOptics and Wellfleet. It never seems to work out. So how do you keep "two-in-a-box" from being two angry wolverines in a box, where only one comes out alive?

Gertel: Look, it always depends on the personalities of the people sitting there. We have 14 sites worldwide. We have a very broad product line. We have locations almost on every continent. LR: So if you get sick of each other, you can at least stay apart?

Gertel: [Laughs.] If you throw away the phone, yes. And email.

LR: But why set it up this way?

Gertel: You see it more and more in other companies. For us, it minimized the number of abrupt changes and caused less of a shockwave in the company. You don't want to start changing staff. There's no reason. The companies do not have any overlap to speak of. We may be addressing the same customers, but the product lines are so different.

Plus, we have a vertically integrated company. Between the two of us, we have to cover it all. This merger took nine months between me and Jerry to learn how to do it, so that was one of the thing we talked about.

LR: Jerry's not in the room, so we'll say it: He's older than you (age 63, while Gertel is 46). The CEO bumped up to chairman is often setting himself up for retirement. Is that what's happening here?

Gertel: There's no plan for that, not in my head. You'll have to ask Jerry. We're two-in-a-box and running the company. Boxed up.

LR: Boxed up. And hopefully not killing each other.

Gertel: Right.

Next Page: Optium alone

LR: Before you got the merger offer, what was the plan for Optium going to be?

Gertel: Optium had all the plans in place to continue growing the company.

LR: Were you going to have to buy other companies to do that?

Gertel: Optium grew 34 percent in the last fiscal year. [Ed. note: That's the 12 months that ended Aug. 2.] At the beginning of the fiscal year, we said the majority of our growth was going to come from ROADMs and 40-Gbit/s, and that's what really happened. Now, we feel that there are a few years of growth still to go just maximizing those products.

If I didn't have the deal, I probably would have pushed forward to expand the company and grow the product line. We didn't have any targets at that point, and we were not negotiating with other companies, nor did we have any pressure from our board to do any deal. If I looked at it, we need to consolidate the market. But we also need to have a company that can have the critical mass and R&D associated with those products.

By doing this deal, we're expanding the product line to have the broadest offering in the market. We have the R&D required to support this market -- I think we've talked about R&D being in the range of $100 million per year. This brings you the critical mass to support large customers who have a lot of demand that can come sporadically. The companies are efficient enough to be profitable and growing and be able to support that at the same time.

Many times, people ask me if we want to buy somebody or consolidate. I say, 'Not really,' but if the right reason arrives, with the right partner, we can do something. It's not that we have to do something.

LR: How will you divide R&D between the old Finisar and the old Optium? For something like 100-Gbit/s Ethernet, which side takes the lead?

Gertel: First of all, the main point is not side. There's one company. We're looking at how integrated plan will work. We may have projects where, for instance, some component of it is developed in California, some of it in Israel, some of it in Pennsylvania, wherever the expertise lies. And obviously, there's an integration point where it all comes together.

Next Page: Growth stage

LR: Finisar came from a datacom world, and Optium started as all telecom. Maybe you could split it that way.

Gertel: There are things in telecom that are low bit rate that were not existing in Optium before, and obviously those will keep moving forward where they are. But when you look at 10 Gbit/s and up, there's a lot of commonality between telecom and datacom technologies. So, you see a lot of opportunity to start merging the capabilities, where optical components are made, where optical components are packaged.

Optium used to make a lot of pluggable products in the XFP area. Does it make sense to keep making them in Pennsylvania, or should we integrate those products into our location in Malaysia? We're going to do whatever makes sense for the company to improve gross margin and profitability without hurting the customer.

LR: That was an interesting aspect of Optium, having your own manufacturing in Pennsylvania. So, it sounds like you'll be keeping that.

Gertel: Yes, but you're going to see changes. Pennsylvania is optimized around mass customization -- I know it's not a real word -- meaning making extremely efficient production out of customized products. Short lead time, short development. On the mass production side, Finisar is making 1 million or 1.5 million transceivers per month in many locations. So you're going to see this movement and balancing going on. It depends on how devices are being developed.

LR: You're bigger than JDSU (Nasdaq: JDSU; Toronto: JDU), but do you need to be as broad as JDSU? They're into things, like Optical Amplifiers, that you don't have.

We want to be as broad as we need. We have a critical mass in R&D that actually can address all of what we believe are the technologies we need to drive the company. Finisar is vertically integrated, in that they're making their own Vertical Cavity Surface Emitting Lasers (VCSELs), their own Distributed Feedback (DFB) Laser, and their own receivers. There's a lot of packaging and integration that's done in Malaysia or China. So a lot of those elements already exist in Finisar today. Finisar makes a lot of its own ICs.

LR: How does the optical components sector get more control over pricing?

Gertel: There was oversupply, and that caused some problems that still exist. [See Troubles Linger for Optical Components.]

As a company, you're going to have commoditized products, and you're going to have products which are leading the market. If you look at our company now, other people will have to get as efficient as we are in the commodity side of the business. We're probably one of the few, if not the leading one, in controlling our own Far East manufacturing. We have a huge facility in Malaysia, and we have another large facility in China. Unlike all our other competitors in this business, we control all our own manufacturing. It brings with it certain efficiencies in time-to-market, but also, we don't have an issue of dealing with a contract manufacturer.

— Craig Matsumoto, West Coast Editor, Light Reading