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07 Feb 2005
Newport's acquisition of Spectra-Physics in July 2004 created one of the largest firms in the photonics industry. Jacqueline Hewett caught up with the company's CEO Robert Deuster to find out the background behind the deal and how the merger is progressing.
JH: What was the thinking behind the Spectra-Physics acquisition? RD: Newport's real strategic thrust has always been to support the use of laser technology in our markets. When we looked at how we could grow in the future, the thought of completing the product portfolio and becoming a complete photonics supplier was an intriguing idea.
The only piece that we were missing was the light source. While we supported all the laser companies around the world, we always felt that if we could acquire or partner with one of the two leaders in the field, we would become a significantly more important supplier to the industry.
Spectra was always on our mind, along with some other laser companies. It was a matter of getting the right valuation at the right time and it all came together in mid-2004. By adding the laser to our portfolio, we became a unique company in this space. We could supply the light source as well as all the other optical components, such as motion control and vibration isolation, and become an integrated solutions supplier.
In other industries, there are many examples where large suppliers offer services along with the product in order to make a customer solution happen. We think we can do this in the research market and we know we can do it in the original equipment manufacture (OEM) market. This idea is a bit foreign to the photonics industry but I think it's something that will gain traction very quickly.
How did the acquisition affect the size and revenue of the company? The deal doubled the size of the company from a revenue standpoint. Our running rate in sales is about $100 m (€77 m) per quarter now, which is literally double what Newport was doing in 2004.
In terms of employees, we now have about 2100 people, whereas Newport had about 1000. Facility-wise, we have five major sites: three in California and Arizona, one large facility in France and a small facility in Connecticut.
How have you organized and rebranded the enlarged company? Since completing the acquisition in July 2004, we've reorganized the company into two divisions. The laser division, which is all the light technology that Spectra had. And the photonics products technology division, which is all of Newport's traditional products integrated with all of the Spectra individual units like Oriel and Corion.
We intend to keep the Spectra brand, so Spectra-Physics-branded lasers will remain. Oriel has a strong brand name and, for now, we are integrating that side-by-side with Newport. We're converting other products like Corion and some of the filter technology to the Newport brand over the next year.
How is the merger progressing? The merger is going very well. Prior to the acquisition, the companies had about a 70-80% customer market overlap. The integration involves looking at where there is redundancy and excess capacity, and trying to trim it back. It's not a radical remake of the company - only about 5% of our sales were in products that overlap.
The overlapping products are in the areas of optomechanics, motion control and vibration isolation. We are eliminating those products that were sourced from other people or manufactured in lower volumes, and replacing them with Newport-branded products. There have been no laser products involved.
During the next six months we will complete the two facility consolidations that we announced in August 2004, which will result in product technology moving to other Newport plants. The net reduction in head- count will be about 100. We expect to generate somewhere in the region of $12 m in annual cost-savings from that activity. We expect to complete it by the second quarter of 2005, both on time and ahead of budget.
How will the acquisition affect your geographical spread of sales? Newport has always had a strong presence in Europe, thanks to our French facility. Spectra has not had such a strong presence in Europe, so putting both companies together gives us a nice European base.
The opposite was true in Japan. Newport was selling indirectly into Japan. Spectra has had a strong team there since the early 1980s, so it's a good meshing of talent from a sales, service and product-distribution point of view. If you took a snapshot of our sales at the moment, roughly 60% are from the US and North America. Newport - prior to the acquisition - took about 7% of its sales from Europe and the Far East, primarily from Japan.
Now, just by the addition of Spectra, the percentages look like 20% in Europe and 20% in the Far East. We're much more balanced and have an important footprint in those geographical areas to build from. We now have the direct distribution that we wanted in Asia, especially Japan, and we expect those markets will show pretty brisk growth for the next few years.
What are Newport's key markets? It's very clear today that the number one market we serve is research. Last quarter, that was 39% of our sales. We want to be able to provide a solution to researchers 24/7, whether it is a large laser system or small optical component; it doesn't matter.
The world is being driven by electronic commerce and overnight deliveries. We feel we can operate anywhere - meeting needs in a way that no other supplier can in this space.
Our second key market is microelectronics, at about 25% of sales. We supply lasers, optics, or combinations of these as subsystems to firms that make capital equipment or process and package semiconductors using laser marking or trimming.
The microelectronics market peaked in 2004 and is headed for what we consider to be a minor correction. We expect it to continue to be relatively weak for the next two quarters, but then rebound in the later part of 2006. We think it is a correction based on market demand, and not a long-term downward drift that may last several years.
Our number three market is life and health science, which is the use of laser technology in all sorts of analytical, diagnostic and therapeutic equipment. It is 17-18% of our sales.
The last strategic market is aerospace and defence and homeland security. That has the potential to be an active market for good reasons. Optical technology is well established in defence and there is a lot of money flowing into that space as far as research and product development is concerned.
Those four markets for us constitute over 85% of our sales and it's where we will be focusing the majority of our energies in the future. We see microelectronics as the only cyclical market. We expect slow and steady growth in the research area at high single-digit annual growth. In life and health science, as well as aerospace and defence, we foresee low double-digit annual growth for the next few years.
How has the acquisition affected Newport's financial results? In our third-quarter results, we had a lot of integration costs. The company had about $94 m in sales, but a generally accepted accounting principles (GAAP) operating loss because we included the cost of the acquisition. When you take into account all of the costs that have to be reported, it will probably be the second quarter of 2005 before we produce an overall profit. If you look at it on an operating basis before the charges, we are already operating profitably and we will continue to do so with increasing success.
For the fourth quarter, we are expecting increased sales and orders over the third quarter, despite the weak microelectronics industry. I'm pleasantly surprised by market reaction to the acquisition. We're getting a strong response from the research market in terms of the combined product portfolio. We are seeing increased sales into research beyond what we thought we would. Our goal is to continue to have steady growth.
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