Test & Measurement

Acterna Finds Redemption

JDS Uniphase Corp.'s (Nasdaq: JDSU; Toronto: JDU) pending acquisition of Acterna Corp. creates a new powerhouse in telecom test, but it could also mark the final stage of each company's comeback.

Like JDSU, Acterna was a powerhouse that built itself up during the bubble and fell hard with the crash.

"Acterna was public a few years ago and had pretty strong financial leverage. When the bubble burst, they paid the price," says Tom Astle, a veteran optical-components analyst now with National Bank Financial.

Both companies have a history of big mergers, which might have helped them decide to join forces in the $760 million merger deal announced yesterday. It's nothing like the deals of old -- remember JDSU's $41 billion bid for SDL Inc.? -- but measures about ten times bigger than anything JDSU has bought lately (see JDSU Buys Into Testy Market, JDSU Grooms Tiny Acquisitions, and, for old time's sake, JDS Uniphase (JDSU)).

Here's the simplified history. JDSU was created from the merger of JDS Fitel and Uniphase in 1999 and kept acquiring after that, peaking with the $41 billion buy of SDL (see JDSU/SDL: A Component Powerhouse).

Acterna lived on a smaller scale, but had a similar merger-happy history. The company was the combination of TTC, which was a portion of publicly held Dynatech Corp., and Wavetek Wandel Goltermann Inc., which was itself a product of mergers (hence the long name). The WWG acquisition was a leveraged buyout financed by private equity investor Clayton, Dubilier, & Rice Inc., the same firm that owns 48 percent of Italtel (see Scuttlebutt: Italtel's Up for Grabs).

Dynatech effectively became Acterna after that, a publicly traded company with 4,000 employees and annual revenues exceeding $1 billion. Clayton, Dubilier & Rice was the majority shareholder, owning 90 percent of the stock at first, says John Peeler, Acterna's CEO.

Acterna built up a leading market share, but its mergers left the company with crippling debt once the telecom crash arrived. Acterna voluntarily filed for Chapter 11 bankruptcy protection in 2003, emerging in October of that year as a private company with all equity held by its debt owners (see Hitachi First-Half Sales Rise).

Acterna didn't vanish from the scene, though. "I would see them at trade shows," says Astle, who follows Acterna competitor EXFO Electro-Optical Engineering Inc. (Nasdaq: EXFO; Toronto: EXF). "They had to restructure pretty aggressively, so they lost some share."

Perhaps because it's smaller than JDSU, Acterna has bounced back more quickly. Acterna was even at a point of considering an IPO again. "We have been working on our liquidity strategy for the past year," says Peeler, who's expected to oversee all of JDSU's test and measurement operations after the merger. "We think [the merger] is a better route than an IPO."

Trimmed to 1,770 employees, Acterna is back to pro-forma profitability and saw revenues grow 8 percent to $440 million for the fiscal year ended March 2005. Eight percent seems "in line" with how the test market is going, Astle says. "EXFO has been growing at 30 percent year-to-date, but it's a smaller company that exploited the FTTP space," he says.

All of Acterna's employees would make the transition to JDSU after the merger, Peeler claims. "We will be the test and measurement division of JDSU, a standalone group with our own products, sales, and manufacturing," he says. Groups such as information technology and human resources will be merged with JDSU's shared services organization, which pools those functions for JDSU's acquired companies.

Because it's doing well, Acterna could help JDSU get to profitability faster. JDSU expects the merger to be immediately accretive, meaning Acterna wouldn't be a drain on the books. And, as CEO Kevin Kennedy noted on a conference call yesterday, Acterna gives JDSU a direct link into service providers including cable operators.

"Acterna is very involved in the up-front planning phase with the network operators," says David Gudmundson, JDSU's senior VP of corporate marketing and development. By getting a foot in the door at that early phase, JDSU could increase its visibility and its chances of selling products into the network later, he says.

— Craig Matsumoto, Senior Editor, Light Reading

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