Bookham fuels growth through targeted acquisitions

28 Nov 2003

Thanks to a spate of acquisitions, Bookham Technology is now one of the top three vendors of optical components. Oliver Graydon catches up with its CEO, Giorgio Anania.

From Opto & Laser Europe December 2003

Over the past 24 months Bookham Technology, the UK-based integrated optics specialist, has transformed itself from a small lab in Oxfordshire into one of the biggest suppliers of optical subsystems to the global telecoms industry.

Turning its back on its own home-grown silicon-chip technology (application-specific optical circuits, known as ASOC), Bookham has made a series of carefully targeted acquisitions that are propelling it into the big league. Using stock from a bumper initial public offering (IPO) at the peak of the telecoms boom in 2000, Bookham has since spent in excess of $350m acquiring a total of five firms from the world of optics (see box).

At the top of Bookham's shopping list were the loss-making component arms of Marconi and Nortel, which were snapped up at the end of 2001 and 2002 respectively. This year Bookham's appetite for growth continued with the purchase of Ignis, a maker of transceivers, and Cierra Photonics, a thin-film filter specialist. As Opto & Laser Europe goes to press, the latest purchase is New Focus, the Californian supplier of photonics test and measurement equipment.

Over the past few months Bookham has been busy restructuring its operations in an attempt to reduce its cash burn and reach profitability for the first time in its history. Its most recent financial results for the three months to September 2003 show that good progress is being made. For the third quarter Bookham reported revenues of £23.1m and a negative gross margin of only £0.4m. Cash burn for the period, primarily due to one-off restructuring charges, was £22.9m and this is forecast to drop to less than £10m in the fourth quarter.

Bookham's CEO Giorgio Anania spoke to Opto & Laser Europe about the firm's acquisition strategy and its ambitions.

How did the Bookham strategy adapt to the market crash ? Up until 2000, we were the company that was going to take the silicon chip and print hundreds of optical functions on it using our ASOC technology. That's what drove our successful IPO. Then the market turned around and the demand for very high-level integration got pushed back by many years. We could see that the market was going to be 10 times smaller and that our market share was going to be 10 times smaller within it. That's what drove our series of acquisitions. When the market is consolidating and becoming much smaller, you either gain some size or become irrelevant.

Hence the acquisition of the Nortel and Marconi component activities? Yes. We explicitly set out to find opportunities in the industry. Actives seemed to be the biggest portion of the market and that's what brought us to approach Nortel and Marconi. The Marconi acquisition gave us a great fab [fabrication facility] and some great III-V semiconductor design expertise, while Nortel gave us a massive manufacturing capacity and one of the widest product portfolios in the industry.

Marconi and Nortel were willing to give these component divisions to us for very little because both entities were haemorrhaging cash. Nortel had been shipping in the order of $1.1-1.2bn per quarter at the end of 2000. By the time we took it over it was closer to $25m per quarter, but the manufacturing capacity and the product set was still there. We said that within a year we could bring that cash burn down to a figure that was sustainable by reducing costs. We've now done that, but it didn't take a year - it took three quarters.

But why acquire small firms like Ignis and Cierra? You can't afford to be in a market that's mid-sized and not play to most of it if you want to be the leader. If you look at the telecoms market, we were in two out of the four major segments. The biggest is transmit-receive and the next biggest is amplifiers, and we believe that Bookham is world-leading in both of those. The two smaller segments, which we were not involved in, were passives and then transceivers.

We chose to acquire two small entities with very little manufacturing but some of the best brains in the industry. So Ignis, we felt, was the top-end design team in next-generation transceivers and Cierra was the top-end brains behind some of the larger previous players in thin films. So we went for focused acquisitions - small groups of people, but the top brains we could find.

What are your future ambitions? Bookham's ambition is to be a major industrial player in a number of areas that build on its optics know-how and chip fabrication technology. What we have is a massive manufacturing capacity and a massive R&D know-how that's applicable in lots of areas. One of our main strategies has been to get costs under control as soon as possible, and we've done most of that. After that Bookham is basically a growth story.

Although we are a major player in the telecoms market, we need to think about what more we can do to grow aggressively. If Bookham was twice the size it is today we would be vastly profitable. The issue is how to get more scale to support the fixed costs.

So the New Focus acquisition is part of a diversification plan? New Focus gives us three things. First, it gives us the cash that we need to give the market confidence and for things like further acquisitions. Second, it gives us an assembly facility in China, which we were looking for anyway. It's a facility that would probably cost almost $40m in cash to set up from scratch, but in today's depressed market is worth around $20m. Third, it gives us a growing $25m business which is practically break-even and which is present in all of the markets into which Bookham wishes to start injecting its technologies.

Why is a facility in China so important? It's important to be a low-cost producer to maintain a good price point even during these difficult times. If you start off with one of the least expensive and most productive semiconductor fabs around and you put it with one of the cheapest assembly operations, you should not be beaten by anyone.

Tell me about your third-quarter results and move to profitability. We have seen growth in Q3 and we have a massive investment in non-telecoms areas that we expect to translate into revenue next year. Bookham is about growth, make no mistake about that. It's not about cost-reducing your way into profitability.

No plans for further restructuring? No - its been quite painful up to now. We feel that we've finished consolidation of our fabs. We had five a year ago, and now we have one major one and a smaller one. All of the chips are now made in Caswell, apart from a Zurich facility which is much more focused. We believe that the Caswell fab is probably the best in the world right now. I believe it has the only 6-inch GaAs and 3-inch InP lines in optics.

Will you move up the food chain? Our customers are focused on adding value and are asking companies such as Bookham to move up. As a major supplier to the telecoms market you don't really have a choice. If Bookham wants to remain as one of the leading suppliers it needs to provide complete subsystems. You cannot be just a component supplier and ultimately it isn't healthy to be selling components that need to look and feel like someone else's. The way to really cut costs and be successful is to provide a subsystem and put your own thinking into the internal design.

Are there still opportunities for start-ups? I think the game is shifting from technology towards service. The system integrators can only deal with a limited number of players as they want to be buying major subsystems. I see the industry changing so that niche players with good technology either get acquired or become suppliers to subsystem makers like Bookham and JDSU.

Pre- and post-telecoms crash - how do things compare? The trouble is that consolidation is not happening at the system level, although the operator sector has shrunk enormously and will probably rebound at some point - my personal guess is 2005.

The news at the component level is much better, because there is consolidation. The larger players are benefiting from concentration of market share and so can become profitable in the current market conditions. Secondly, there is a move to subsystems, which adds value, and thirdly, inventory is being used up.