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Finisar and Optium aim for top components spot

19 May 2008

The merger of Finisar and Optium could create the largest optical components supplier, ousting JDSU from the number one position.

Consolidation in the optical components industry, which has remained elusive for months, finally kicked off today with the news that Finisar and Optium have reached a definitive agreement to merge in an all-stock transaction worth roughly $212 million.

The deal calls for each Optium share to be exchanged for 6.262 Finisar shares. Upon completion, Finisar and Optium shareholders will own approximately 65% and 35% of the combined company respectively.

The pair say that the combination will create the world's largest supplier of optical components, modules and subsystems for the communications industry — overtaking the current number one player, JDSU.

The deal will come as welcome relief to the telecoms industry in general. The sheer number of optical components suppliers has created a cut-throat market environment where vendors are forced to compete on price — sometimes cutting their own throats in the process. Today's news represents the first step towards a healthier industry.

What's more, the two vendors appear to have broken down the usual barriers to consolidation — overlapping product lines, poor profitability and lack of shared interests — to create a deal that's attractive to investors.

Finisar's stock went up 20 cents (15%) to $1.53 in trading on Friday, while Optium climbed 89 cents (10.9%) to close at $9.03.

Finisar currently occupies the number two position in terms of market share, while Optium is the number ten supplier. Combining the revenues of the two optical vendors gives total revenues (based on the last reported quarter, annualized) of around $612 million, according to a statement issued today.

For comparison, JDSU's revenues, calculated the same way, were $544 million. (This does not include revenues for the vendor's test and measurement, advanced optical technologies or commercial laser units).

On top of that, both Finisar and Optium said that they expect to announce record revenues for the next quarter ending on April 30, which would raise annualized revenues for the combined company to a total of approximately $660 million. Finisar will announce its financial results on June 12, while Optium will report on June 5.

However, it's worth pointing out that the actual reported revenues for JDSU's optical communications business totalled $605.1 million for the year up to March 30 2008. The numbers are close, and which vendor eventually comes out on top will depend on whether market share is won or lost. Both Finisar and Optium have posted strong growth in recent quarters, while JDSU's optical components revenues are lower than a year ago, despite a slight increase in the most recent quarter.

Merger motives
For both Finisar and Optium the drivers behind the deal were the same: to create scale, not just in terms of revenues but in terms of the range of their offerings. "With little product overlap we will create the largest portfolio in the industry, and naturally we will enjoy economies of scale," claims Finisar chairman Jerry Rawls.

Finisar sells primarily into enterprise and storage networking markets, while Optium's main customers are in the telecoms space with a smaller percentage in cable TV.

Rawls notes that the primary area of product overlap is in 10 Gbit/s pluggable modules, which represents a $3.1 million business. "This is not revenue that goes away, but an opportunity for manufacturing synergy," he says.

Finisar recently took an equity stake in reconfigurable optical add-drop multplexer (ROADM) start-up Nistica, but Rawls doesn't see any conflict with Optium's home-grown ROADM products. "The major product from Optium is high port-count, while Nistica's is an edge device," he notes. "For 1x2's it's the Nistica approach using non-hermetic packaging that could be the most cost-effective approach."

Likewise the pair view their different manufacturing strategies as complimentary — Finisar is vertically integrated, while Optium operates a fabless model. "We see it working very well," says Rawls. "Finisar's products have a much higher run rate than Optium's. We're talking 30,000 versus millions per quarter. All in all we'll keep balancing those components.

The transaction is expected to close, subject to the usual approvals, in the third quarter of calendar 2008. The Finisar name will survive, and the combined company will continue to trade on the Nasdaq stock market under the symbol FNSR.

Jerry Rawls will remain as the executive chairman of Finisar's board; while Optium's chairman and CEO Eitan Gertel will become president and CEO of the combined company.

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