That should sound familiar, because it's the rationale that was behind the 2009 merger of Avanex and Bookham that created Oclaro.
That was a long-awaited event that many people worried would drown both companies, considering each had had trouble cutting costs and making any profits. Oclaro and Opnext are both expected to report losses for the next few quarters, but the companies apparently believe their combined scale is necessary.
Oclaro and Opnext overlap in relatively few product areas, so it's not a case of saving money by making massive cuts. Rather, the deal is about setting up prospects for the future, says analyst Karen Liu of Ovum Ltd.
"I don't think they were endangered" before announcing the merger, she says. "But I think the ability to grow was limited."
A wider scope would also give equipment vendors a better reason to consider Oclaro/Opnext a critical supplier.
"When we merged Bookham and Avanex, we became a Tier 1 supplier to our customers," Oclaro CEO Alain Couder said on Monday afternoon's conference call with analysts. "Now it's going to be even more [so], because we are going to have all the core technology needed" for future developments, he said.
The deal would also put the combined company on a more level footing with Finisar Corp. (Nasdaq: FNSR) and JDSU (Nasdaq: JDSU; Toronto: JDU), in terms of revenues.
Table 1: Optical Components Revenues
|Company||Revenues, past four reported quarters (in millions)|
|Source: Yahoo Finance, Seeking Alpha|
A point worth noting at this juncture: Oclaro and Opnext, combined, would have overtaken JDSU by now in terms of annual revenues, were it not for the 2011 floods in Thailand, Oclaro Chief Marketing Officer Yves LeMaitre tells Light Reading. Opnext's production at contract manufacturer Fabrinet Co. Ltd. (NYSE:FN) was hurt more than most by that natural disaster. (See Optical Industry Adjusting After Thai Floods.)
Indirectly, the combined company would be going on the offense against smaller suppliers, blocking them from joining the Tier 1 club.
"The customer will only work with the smaller guy if they cannot get what they want from the top three," LeMaitre says. "There are companies -- I don't want to give names -- with one cool product or two cool products, and they're really struggling to get to the next level. With this merger, we make it almost impossible."
One area where Oclaro and Opnext would save some money is in development of 40Gbit/s and 100Gbit/s modules -- something both companies were working on. (See Oclaro Joins Opnext at 100G.)
Both companies also plan to move test and assembly to lower-cost venues. Oclaro has been moving those functions to a contract manufacturer in Malaysia, taking them out of Oclaro-owned facilities in Zurich and in Shenzhen, China. Similarly, the Opnext test and assembly facilities in Japan and California could be moved to a more cost-efficient location in the Asia/Pacific region. (See Oclaro Preps Malaysian Move.)
The combined company would hang onto its five semiconductor fabs, though, he said. That points to the trend of vertical integration that's been happening in optics, with all of the remaining large companies owning fabs. In particular, the opportunities to reduce costs in optical modules are likely to come from inventions at the chip level, Couder said.
— Craig Matsumoto, Managing Editor, Light Reading