Finisar & Optium Challenge JDSU
It's one of those merger-of-equals deals, with the companies pooling stock and the two CEOs sharing the helm. Each Optium share would be traded for 6.262 Finisar shares, making the deal worth $244 million as of Friday evening. (See Finisar/Optium Merge.)
The new company will be called Finisar and will retain the FNSR stock ticker.
Finisar shares rose 20 cents (15%) to $1.53 today, while Optium climbed 89 cents (10.9%) to $9.03.
JDSU has lorded over a weakened optical components field for years -- the entire century, come to think of it -- but that reign appears to end here.
Finisar and Optium say they've had combined revenues of $554 million for the past 12 months. JDSU, for its recent third quarter, reported optical components revenues of $136.1 million, implying an annual rate of $544.4 million. (See An Optical Merger!)
On top of that, Finisar and Optium both raised their revenue forecasts for this quarter, to $120 million and $45 million, respectively.
It's not surprising that investors like the deal, considering the optical components industry has long awaited a large merger. Avanex Corp. (Nasdaq: AVNX) and Bookham Inc. (Nasdaq: BKHM; London: BHM) reportedly came close to a deal but never pulled the trigger. (See Will Avanex Hook Bookham?)
A large deal was necessary, many said, in order to curb the oversupply in the industry. The aftermath of the telecom crash after 2001 left many components suppliers still on the map. In competing with each other, they kept pushing prices down, a key factor that turned profitability into a years-long quest for most players.
Finisar and Optium have so little overlap among their products that their merger isn't liable to eliminate much capacity. But the deal creates a powerhouse that will stand out at a time when customers -- Cisco, most notably -- are trying to limit the number of suppliers they work with.
That process has handed JDSU a big advantage, one that the new Finisar hopes to share.
Along those lines, the merger would create more of a headache for the rest of the field -- more so than for JDSU.
"The key is that it probably turns up the heat on Avanex and Bookham to merge with someone," Harmon says. "I don't think JDSU reacts. They've got a lot of businesses to manage and a lot of work to do."
The deal started with a call from Rawls nine months ago. Finisar has been making acquisitions to increase its telecom portfolio, and Optium's 10-Gbit/s tunable transponders represented a profitable product line that Finisar so far lacked.
"Optium products are in categories that Finisar wants to enter, so it's going to save Finisar huge amounts of R&D dollars," Harmon says.
Finisar could have continued acquiring smaller companies, but it was starting to show signs of wariness about that strategy. In getting into the reconfigurable optical add/drop multiplexer (ROADM) market a few months ago, Finisar chose to invest in tiny Nistica rather than acquire the startup. (See Finisar Moves Into ROADMs.)
What Optium gets out of the deal is the breadth to be in JDSU's league, and an in-house source of components that it can "cherry-pick" from, Harmon says. Optium's transponder business is fabless; the company buys components from the outside and assembles them itself in a Pennsylvania facility.
That facility wouldn't be going away; Optium has always said it gets an advantage from the customization that's possible there. Finisar does its manufacturing in Malaysia, but that's because its products go into more mass-production markets than Optium's.
"At Optium, we make 30,000 to 40,000 modules per quarter. At Finisar, you're making 3 or 4 million modules per quarter, and they're for different kinds of products," Optium CEO Eitan Gertel says.
As for who exactly is piloting the new ship, Rawls will take the title of Chairman while Gertel will be CEO, "but we're going to share the top job, whatever you want to call it," Rawls says. He likens it to Finisar's earlier days, when Rawls and Frank Levinson effectively ran the company together.
For more on Finisar's telecom ambitions and Rawls's view of the industry, check out the video below.
— Craig Matsumoto, West Coast Editor, Light Reading