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Optical components

Will Avanex Hook Bookham?

Long-struggling optical components firms Avanex Corp. (Nasdaq: AVNX) and Bookham Inc. (Nasdaq: BKHM; London: BHM) could be merging, according to rumors rattling through Wall Street and the optical industry during the past week.

One theory says the deal is imminent, with Bookham CEO Georgio Anania having spent the last two weeks in the Bay Area to put the signatures on the contract.

Most sources say the idea isn't a bad one.

"If that's true, it would make some sense. It would be an opportunity to take some cost and capacity out of the industry," says Tim Savageaux, an analyst with Merriman Curhan Ford & Co.

Bookham officials say they won't comment on rumors. Avanex officials couldn't be reached for comment.

The deal would create a larger company -- an important factor, given the spate of big-name mergers such as the pairing of Alcatel (NYSE: ALA; Paris: CGEP:PA) and Lucent Technologies Inc. (NYSE: LU). As customers get fewer and bigger, they might favor larger and broader component suppliers, a possibility that's helping to drive mergers at firms such as JDSU (Nasdaq: JDSU; Toronto: JDU) and NeoPhotonics Corp. (NYSE: NPTN)

"Our customers have consolidated -- that's a key," says one components exec who requested anonymity. "Even our customers' customers are consolidating. Maybe companies could leapfrog each other by making some bolder moves."

Vague Avanex/Bookham rumors flicker through the industry from time to time. The trigger making this iteration real, sources say, might be Bookham's share price, which arguably is at discount levels compared with Avanex and JDSU. (See Bookham Bruised by Q1 and Infinera Boosts Avanex .)

While a potential deal might be considered a merger of equals, it seems Avanex would have to be the acquiring party. Bookham has the higher revenues, with a $225 million run rate compared with Avanex's $204 million, based on the September quarter. But Bookham's market capitalization is roughly $270 million as of yesterday, while Avanex is valued at $446 million.

As for a price, one source, stressing that this is just a guess, thinks Bookham wouldn't attract that much of a premium -- maybe 25 percent, which would put the price around $340 million.

Avanex and Bookham have struggled mightily since the bubble, with questions raised about each firm's stability. Early in 2005, neither company had the cash to last more than a few more quarters, and it's taken some creative financial wrangling to avoid the abyss. (See Bookham, Avanex Shore Up.)

One source believes a merger deal would include Avanex selling off its manufacturing facility in France, moving that capacity to the Shenzhen, China, site that Bookham has been building up.

That would ease the cost problems that have plagued the companies, as each inherited a bulky manufacturing infrastructure while attempting to become a more serious player in optics. Bookham acquired its facilities along with the components arm of Nortel Networks Ltd. in 2002, while Avanex's French fab was part of the Alcatel (NYSE: ALA; Paris: CGEP:PA) division it acquired in 2003.

Of course, Avanex has been an acquisition tease in the past. Recall the bubble-era tale of Avanex and Oplink Communications Inc. (Nasdaq: OPLK), a planned marriage that disintegrated after a shareholder revolt. (See Avanex and Oplink: Wedding's Off.)

— Craig Matsumoto, Senior Editor, Light Reading

FunkyMunky 12/5/2012 | 3:32:24 AM
re: Will Avanex Hook Bookham? I may be being a bit thick here but why would the Senior Management be selling shares in the low 100's? It just doesn't seem worth the effort to get $1200.

FM
spiritofgravity 12/5/2012 | 3:34:19 AM
re: Will Avanex Hook Bookham? The AVNX/BKHM merger is good for both companies.

1. SG&A and R&D is easier to cut as a percentage of sales when you have higher sales.

2. The morale of those who survive the layoffs will improve if the result is a more stable and successful work environment.

AVNX and BKHM have some overlap in product and customer base, but the majority of their revenues should be accretive. Their products are similar enough that efficiencies can be gained in consolidating manufacturing, which will postively impact GM. Their combined cash is enough to handle re-structuring costs.

Good for the company and its survivability. Given the timing of the deal and BKHM's current valuation relative to AVNX, though, I'm not sure it will be good for BKHM shareholders, especially in the near term. Much depends on the details of the deal.

spirit

realoptics 12/5/2012 | 3:34:19 AM
re: Will Avanex Hook Bookham? The winner of the two CEOs is the one who would take a good package and exit at the merger, leave the other to stay, take up the headache, risks, blames, and facing the uncertain future, which they may not have at all?

As they will still have to struggle with JDSU and Oplink, one is much better on sophisticated things than the combined, and the other is much better for the low cost stuff. So, pessimistically speaking, combining two sinking ships=one big leaking raft

On the other hand, the glass maybe half full-as the industry would allow 3 main players to survive-it is against the will of their customers (Lucent/Alcatel, Fujitsu, Nortel, Tellab, Huawei, Cisco, etc) to 'allow' any of the main players to die completely, in order to maintain the balance of the components vendors, the questions is do we count JDSU, AV/BK, OPLK as the three main or not, or the new contenders will squeeze them out of the top 3?
realoptics 12/5/2012 | 3:34:19 AM
re: Will Avanex Hook Bookham? No choice that they have to merge!

If they don't merge, each of them may take 3-4 quarters to die, separatedly and almost die in the same time and same process?

If they merge, and get rid of half of the combined poeple, the new entity either die in 6-8 quarters, or catch up become profitable in those 6-8 quarters? So in theory it is to save cost and combine the advantages, in practice, there would be a lot of headaches, as the last two weeks, you could assume all the employees at both companies are very inquisitive about thier future, nobody is bothering to carry out jobs at hand.
2by4 12/5/2012 | 3:34:20 AM
re: Will Avanex Hook Bookham? Some good points for sure.
Paignton is pretty much gone - the site has already been sold and Bookham are hunting for new premises. That could easily become a consolidation at Caswell for the few staff they have to keep.
It would be very hard to loose Zurich because of the now growing industrial laser business in addition to the very different nature of pump chips and 1310/1550 telecom lasers.
As to amplifiers, I understood that Bookham's increased business with Cisco is amplifier based and actually came at the expense of Avanex.
The broader question though is not does consolidation make sense, but are these two companies good candidates? Personally, I'd say "No" in this case for two main reasons,
1. Neither company has the balance sheet to pull this off. If you look at both companies over the last 3 or 4 years of so called cost reduction, cutting, off-shoring, etc, you'll quickly see that in reality not that much has changed. Bookham in particular is still spending around 20% of revenue each on R&D and SG&A. That seems serious luxury and I think the management should set a 12-13% target and make sure they hit it as the top line is only going to improve slowly and there are few other options in the bottom line. Avanex to their credit have got that element of their business under control far better, but they are stuck still with no significant change in their gross margins.
2. Avanex are actually doing better at emerging from the mess of the past 5 years or so. Merging with Bookham would put that at risk by de-moralising a workforce who probably think that life is just starting to look hopeful. Morale at Bookham probably couldn't get lower unless you gave them a shovel and told them to dig. A successful merger would be dependent on the good will of all the employees and a belief that there was a future. These two will look like more of the same struggle to those in the front line.

If I were Jo Major, I'd put GA on a plane back to Paris and talk to people like OCP or Luminent instead.
whyiswhy 12/5/2012 | 3:34:21 AM
re: Will Avanex Hook Bookham? Jo:

Get a haircut, dude, or get a better barber.

www.avanex.com

:-)

-Why
Vent 12/5/2012 | 3:34:21 AM
re: Will Avanex Hook Bookham? At the risk of sounding por georgio.
I think the main fault of the management at bookham has been that they are too optimistic.
You have to be cruel to be kind, and the cuts they made were forced and never part of a plan to profitability.
All the optics firms in the UK and elswhere that came out of big companies lost money, they were subsidized by the systems buisness so it's not a suprise that the majority have shut down. The R&D in opto has been subsidised by the systems people or the dumb VC's during the boom.
But what will be left.
Freemont certainly, amps at NY, the milan modultaors, Zurich for the pumps
Painton will probably go
But Nozay or Caswell ? the French are not in Avanex's top sites but it takes a lot of effort to close a plant in france. It's far cheaper to shut caswell
Interesting

^Eagle^ 12/5/2012 | 3:34:22 AM
re: Will Avanex Hook Bookham? DZED,

Well said. Truly a tragedy what has happened to UK optical communications industry. GA also had a big hand in crushing viable optics plays in Canada and several in USA.

GA was not the only one with his hand in the cookie jar. Lots of senior BKHM execs in various generations of the company have take large chunks of cash off the table and stuffed it in their pockets.

While perhaps not legally defined as theft, morally and ethically, what GA, most of the V level staff and othe "C" level staff have done in Bookham, as well as what has been done by many other "leading" lights in our industry at other companies is definitely grand larceny.

Robber barons have always been thus.

sailboat

DZED 12/5/2012 | 3:34:23 AM
re: Will Avanex Hook Bookham? I forgot:

If Anania can sell Bookham he and the BOD avoid getting their bums sued off by the shareholders when the whole thing implodes.

Much easier to let Avanex take it over and use the remaining cash to pay off the staff and close the sites than face the music.

GA will be remembered as the guy who burnt $1bn and closed down the UK Optics industry.
Cathi48 12/5/2012 | 3:34:28 AM
re: Will Avanex Hook Bookham? Thanks, deauxfaux, for the excellent, detailed response. It's very much appreciated.

Kennedy has recently reemphasized that JDSU intends to be a consolidator in the test and measurement sector...so it will be interesting to see what companies or asset acquisitions get added here.

Cathi
deauxfaux 12/5/2012 | 3:34:29 AM
re: Will Avanex Hook Bookham? Jo as CEO, Georgio as COB

ROTFLMAO
deauxfaux 12/5/2012 | 3:34:29 AM
re: Will Avanex Hook Bookham? You are 100% correct!!!!

He will walk out of this mess as a self annointed hero: a brilliant move on his part if he can pull it off.

I can hardly wait to read his severance deal in the proxy
fbgboy 12/5/2012 | 3:34:30 AM
re: Will Avanex Hook Bookham? Nice to see the questions asked touching on JDS. As many people are aware many vendors sold similar products to all of these incarnations JDS, Nortel, Lasertron etc and made losts of money (heh-heh). There are still sales to the current pick a name now companies. China factories could quickly go Flextronics style and take chunk of manufaxturing jobs with them. (Yes I know flextronics is here also) At the end of the day all it is about is Do I have the sale? and/or how many employees do we have to let go increase profit and where should we sent the work to? Thank you Flextronics for the perfect american business model, ouch, but who cares... show me the money...
deauxfaux 12/5/2012 | 3:34:30 AM
re: Will Avanex Hook Bookham? Generally, not much. Here's why

BK/NX has no instrument business to speak of, so JDSU's instrument (Acterna) business certainly wouldn't be affected, and that is about half of revenue last time I looked.

JDSU's former OCLI business also has no analog inside BK/NX and wouldn't be affected. I can't remember how big this is: 20%???

JDSU is really trying to de-emphasize commmodity components and avoid going head to head against the chinese. But BK/NX doesn't have any special cost leadership there...so that doesn't matter either.

So for the 20-30% of JDSU's business in long haul modules that competes with these guys, what would be the impact? Again, not much as BKHM and AVNX both get a lot of their business from their former parents NT and ALA. In the places where they could consolidate, they may gain some cost benefits, but customers don't like putting all of their eggs in one basket, so when mergers occur, the big guys need to maintain their leverage by designing in competitors.

BKHM & AVNX merging won't even make a dent in the consolidation necessary to fundamentally change this business.
^Eagle^ 12/5/2012 | 3:34:30 AM
re: Will Avanex Hook Bookham? Word I hear is that it is a done deal. No, I do NOT work for either, have NO stock or equity at either, and am not an insider for the deal.

I hear from fairly reliable source that deal is done. Details being worked on re which staff get wacked and which plants closed before it is announced and causes panic in the employee base of both companies.

Don't know when it will be formally announced an don't know terms of deal.

Should be an interesting couple of weeks!

sailboat
twill009 12/5/2012 | 3:34:30 AM
re: Will Avanex Hook Bookham? There is no reason for there to be a premium for Bookham -- do not be surprised if it turns out to be a take-under.
bluehawkfly 12/5/2012 | 3:34:32 AM
re: Will Avanex Hook Bookham? Who can tell the change of situation if/after the merging?
DZED 12/5/2012 | 3:34:32 AM
re: Will Avanex Hook Bookham? More likely:

Anania can finally see the light at the end of the tunnel. Cash run out, no more money to be made from share issues, no prospect of fat bonuses, free gifts of cash to himself etc.

The only way of squeezing more lolly from the dry lemon which is Bookham is written into his severance terms.

GA will be out. The only question will be how many additional million dollars he can wring from Avanex to go quietly.

Another thought, wouldn't it be easier for Avanex and JDSU to sit back and watch Bookham perish?
crowther 12/5/2012 | 3:34:32 AM
re: Will Avanex Hook Bookham? Timing could finally be right for this long needed merger. With production in Shenzhen, and Paignton sold the restructuring veil will soon be lifting from the BKHM accounts - and it still ain't pretty.
Vent 12/5/2012 | 3:34:33 AM
re: Will Avanex Hook Bookham? This goes back to the original idea, Georgio just missed out when Alcatel optronics sold to Avanex. The intention was to reduce cost by having just one fab.Maybe this will finally come true
However I can't see this happening unless there is also some extra cash from somewhere to cover the further restructuring costs of closing one of the fabs (Caswell or Nozay)and one of the package design centres (whats left of paignton or Nozay) The amplifier design would all be in NY state. The one possibility I would see for more cash is the sell off of the bookhams china manufacturing plant to an OEM. Avanex already do their manufacturing this way

Venting
Riverhigh 12/5/2012 | 3:34:33 AM
re: Will Avanex Hook Bookham? Don't see either of them surviving on a stand alone basis with $50-60 in revenues per quarter. If they are able to squeeze out the costs on consolidation they may have a better chance of surviving. Consolidation is good for JDSU. Good for the industry.
whyiswhy 12/5/2012 | 3:34:33 AM
re: Will Avanex Hook Bookham? Geo or Jo...who's the boss?

-Why
Cathi48 12/5/2012 | 3:34:34 AM
re: Will Avanex Hook Bookham? deaufaux, what effect, if any, do you see this having on JDSU should this rumored merger take place?
deauxfaux 12/5/2012 | 3:34:35 AM
re: Will Avanex Hook Bookham? The central premise in finance is that you always sell the most overvalued claim on cash flow. The proxy for an equity holder's claim on cash flow is net profit. So in effect (if BKHM is indeed about to be acquired) Georgio would be "shorting" his future earnings.

But after losing $1,000,000,000 and never making their first nickel of GAAP profit, this should not be surprising to anyone.

alcabash 12/5/2012 | 3:34:35 AM
re: Will Avanex Hook Bookham? are they really done with Shenzhen ? I thought that Bkhm still had a fair amount of products produced in UK.
Pete Baldwin 12/5/2012 | 3:34:36 AM
re: Will Avanex Hook Bookham? One curiousity inside this whole theory: Bookham just got done with the heavy lifting in moving manufacturing to Shenzhen.

They've got a couple flat quarters coming, yes, but assuming Anania is right in saying Bookham is about to turn the corner (and obviously some readers here have doubts) ... isn't this an odd time to sell? Wouldn't they be better off waiting for a higher valuation?
DZED 12/5/2012 | 3:15:47 PM
re: Will Avanex Hook Bookham? "I may be being a bit thick here but why would the Senior Management be selling shares in the low 100's? It just doesn't seem worth the effort to get $1200.
FM"

Its called short-termism.
Better $1200 today - and watch the share price collapse when the market finds the execs are ditching their own stock - than $12,000 tomorrow.

This is the kind of strategy Anania employs which has wrecked Bookham.
DZED 12/5/2012 | 3:15:50 PM
re: Will Avanex Hook Bookham? G'Day Mates.

Has anyone noticed the entire Bookham exec team seem to be dumping their ill-gotten free stock just as quickly as they legally can?

In the last few months Anania has off-loaded 2130+2130+25219 shares, the other execs seem to be following pro-rata. I expect this is on the limit of their stock scheme.

As always, the SEC filings lift the lid.
http://investor.bookham.com/ph...

With the stock at practically a one year low, whats going on guys?

So much for Bonex, at least Anania doesn't get to pocket the millions in severance he wrote into his contract.

With insolvency looking likely, and the possibility of an Enron style unravelling of the murky dealings and management team greed, the execs must by now be truly desperate for a sale to cover their tracks.

Shame, as there are clearly good engineering teams there delivering the goods despite the inept egos running the place.

Interesting days ahead.
twill009 12/5/2012 | 3:16:37 PM
re: Will Avanex Hook Bookham? Not such a "Done Deal" after all. Bad company. Bad management. Bad rumor.

Financially, Bookham is a nightmare. Never made a profit, and probably never will. Why would you be willing to buy it? The company has apparently been shopping itself for some time, but has yet to find anyone foolish enough to take the bait.

Goes to show how message boards -- even at a quality site like LR -- are not to be trusted.
Vent 12/5/2012 | 3:16:38 PM
re: Will Avanex Hook Bookham? Shame
So Giorgio was holding out for MORE cash to go
and not enough to shut available down one of the fabs.
Well we will wait for the next Qtr results to see how long Bookham will have left on it's own
possibile Avanex can pick up the interesting bits in a fire sale at the end of the year

Vent
^Eagle^ 12/5/2012 | 3:16:41 PM
re: Will Avanex Hook Bookham? word in sili valley is that the deal is dead. Unable to find appropriate financing for the additional cash that would have been burned doing the integration of the two companies (cost to shut down plants, cost to terminate employees, etc.). Also heard that the amount of $$ demanded by some of the executives that would have been cut was too rich to finance.

of course the boards of both companies could put a deal back on the table and force the issue. however, rumor mill has it that the deal is dead.

sailboat
Vent 12/5/2012 | 3:16:41 PM
re: Will Avanex Hook Bookham? On this board it was mentioned that the avanex Bookham merger was a 'done deal'
Now it's all gone quiet
Is it off ?? or just waiting until the results announcements later in month
They must saw something by then or not??????

Vent
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