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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

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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
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
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.
^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

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

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.
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?
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