Optical Mergers Get Tougher From Here
For years, people including me have been saying the optical components sector needs to consolidate, and it's happening. The pace might seem glacial -- it's been three years since Bookham and Avanex combined to form Oclaro -- but the top tier of the market really is winnowing down to a few players. (See Oclaro & Opnext Strive for Scale.)
There's almost a balance there, with Finisar leading in terms of revenues and (according to Ovum) market share, and JDSU (Nasdaq: JDSU; Toronto: JDU) and New Oclaro neck-and-neck behind it. New Oclaro would be a clear second place were it not for the Thai floods, Oclaro executive Yves LeMaitre says, and he might be right. (See Optical Industry Adjusting After Thai Floods.)
The next big move could take a few more years. No combination of the three market leaders -- Finisar Corp. (Nasdaq: FNSR), JDSU (Nasdaq: JDSU; Toronto: JDU) and New Oclaro -- looks comfortable.
And any deal where one of them snags a substantial next-tier player -- say, NeoPhotonics Corp. (NYSE: NPTN) -- is going to have substantial product overlap, meaning it would be followed by product-line terminations and substantial layoffs.
A lot of people say that's exactly what needs to happen: a removal of products and capacity from the market. I wrote about that idea back in 2006. (See Valley Wonk: Optical's Options.)
Finisar and Oclaro have no experience in that kind of deal. JDSU sort of does. During the early 2000s, company officials had to cut tens of thousands of employees -- but those occurred under a different CEO regime, and they don't exactly represent past times that JDSU wants to relive. None of these players seems eager to make that kind of deal.
Maybe someone else is. Private equity firms have reportedly been eyeing the optical sector for some time -- both components and systems -- and at OFC/NFOEC I heard varying theories about how they've assessed the industry. If what's best for the industry is true consolidation -- rolling companies together and purging large chunks -- private equity is the most likely avenue for making it happen: someone with no love for the technology and few friends in the industry, making the draconian decisions about what stays and goes.
During the OSA Executive Forum in March, I suggested the possibility that the current situation is simply it, that components vendors have reached equilibrium at low profitability levels, with pricing at the mercy of their customers. It's not ideal, but it's survivable. To the people involved, it might be preferable to having private equity walk in and "fix" things.
— Craig Matsumoto, Managing Editor, Light Reading