Oclaro Inc. (Nasdaq: OCLR) had a few acquisition options for its reconfigurable optical add/drop multiplexer (ROADM) plans, and it appears a combination of price and future roadmap is what made Xtellus Inc. the winning candidate.

Oclaro last week announced it had acquired Xtellus for $33 million in stock. (See Oclaro Makes Its ROADM Bid.) With Oclaro president and CEO Alain Couder in New Jersey to introduce Xtellus's crew to Oclaro, he and Xtellus CEO Krishna Bala called Light Reading together to talk about the deal.

Couder says Bookham had earlier considered acquiring a ROADM startup, or at least striking up a marketing partnership with one. But that action took a backseat to the Avanex acquisition, the deal that created Oclaro.

Oclaro reignited its interest in ROADMs after seeing September-quarter revenues come in higher than expected. Oclaro contacted Xtellus, which makes a ROADM component called a wavelength-selective switch (WSS), in mid-October. Because Xtellus and Bookham had spoken previously, the deal came together quickly, Couder says.

Xtellus had plenty of reason to sell. The company got to talk to carriers but wasn't going to get any big contracts as a standalone shop. "They were afraid to buy from a smaller company," Couder says.

"We looked at this coming year as the year that's going to separate the winners and losers in this space," Bala says. "We were going to be in a weakened position."

Couder says Oclaro liked Xtellus's product lineup, which consists of smaller WSSs based on liquid crystals and larger ones (mostly the 1x5 configuration -- able to add or drop five wavelengths on one fiber -- and larger) that also incorporate micro-electromechanical systems (MEMS).

What was important was the ability to fit into larger ROADMs. "Customers are asking for 1x9 or more," Couder says.

Oclaro could also have gone after CoAdna Photonics Inc. , which netted a name-brand customer in Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) after startup Metconnex died. (See Competition Kills Metconnex and CoAdna Intros WSS.) Couder suggests CoAdna wasn't considered as well suited for higher port-count ROADMs, though.

It's more likely Oclaro picked Xtellus because of the price, says Andrew Schmitt, an analyst with Infonetics Research Inc.

"Oclaro didn't pay an outrageous amount of money for what they're getting," Schmitt says. "Are there players out there with bigger market share? Absolutely. But for the value, they got a good deal."

That would mean Oclaro sacrificed some market share initially. But the difference might not be that large; neither CoAdna nor Xtellus is a screaming leader in ROADM components. JDSU (Nasdaq: JDSU; Toronto: JDU) holds the market crown, and it's Finisar Corp. (Nasdaq: FNSR) that has most analysts' attention as a significant contender. (See Finisar Climbs ROADM Ranks.)

Morgan Keegan & Company Inc. analyst Paul Bonenfant puts Xtellus's sales at around $15 million this year and $17 million to $23 million next year. Most of that comes from wavelength blockers, an older, simpler breed of ROADM component that can handle only one wavelength apiece. (In terms of port configuration, they're 1x1 parts.)

He lists NEC Corp. (Tokyo: 6701) as a customer and thinks Xtellus has a shot at 1xN business with Cisco Systems Inc. (Nasdaq: CSCO) and Huawei Technologies Co. Ltd. , both of which count Oclaro as a strategic supplier.

As for the other prominent ROADM component startups, Capella Photonics Inc. announced a win in 2006 as the foundation of the ECI ROADM. (See Capella Enlists Fabrinet.)

Nistica , a subsystems provider and a relatively new entrant, hasn't announced any wins but still has a partnership with Finisar, at least on paper. Nistica is targeting smaller ROADM configurations, so it probably wasn't an acquisition option that Oclaro considered. (See Finisar Moves Into ROADMs and Nistica Goes Full Fledge.)

— Craig Matsumoto, West Coast Editor, Light Reading