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Oclaro and Opnext join forces in $177M merger

27 Mar 2012

All-stock deal will create world's second-largest provider of optical components and modules for communications.

Oclaro and Opnext, two of the best-known manufacturers of laser diodes and related optical components and modules, are to merge.

Assuming that they and regulators approve the deal, Opnext shareholders will receive 0.42 shares in Oclaro for every share of Opnext common stock that they own. The all-stock deal, which the two companies say will mark a “major transformation in the optical industry”, values Opnext at around $177 million – equivalent to a premium of nearly 74% on the Opnext stock price at closing on March 26.

According to figures from the telecommunications industry analyst Ovum, Oclaro and Opnext currently rank as the sixth- and seventh-largest producers of optical components and modules respectively. Post-merger, and using figures that do not include the impact of the recent floods in Thailand that hit Opnext particularly hard, they are expected to rank second, behind Finisar and ahead of JDSU, Sumitomo and Avago Technologies.

Oclaro CEO Alain Couder, who oversaw the previous merger of Bookham and Avanex to create what is now Oclaro, said of the planned deal: “This merger clearly will be a unique and transformational opportunity. Our respective customers want to work with fewer, more strategic suppliers who can deliver the breadth of technologies that they need.”

Although both companies currently sell many of their products to the same customers in the optical communications sector, Oclaro and Opnext do sell different products and so the merger is seen as highly complementary by the two management teams. Telecom applications in the core optical network will clearly be the strongest element of the combined business, with the potential to grow a much larger presence in datacoms and consumer/industrial applications based on similar optoelectronics expertise at the chip level.

Speaking to investors about the deal, Opnext CEO Harry Bosco said: “This combination will create a company with a complementary product line that nobody else in the industry has.”

Industrial/consumer business
The main focus and motivation for the merger clearly comes from the communications side, but the two companies complement each other even more obviously in non-telecommunications applications – which represent about 15% of combined sales currently.

For example, Oclaro’s key strengths include high-power laser diode and VCSEL manufacturing facilities in Zurich, Switzerland, while Opnext produces blue emitters based on gallium nitride semiconductor chips.

At the moment, those non-telecom lasers are being used in a range of applications including medicine, printing, defense and high-power systems for materials processing. Couder and Bosco are hoping to see growth from both those applications and new uses like 3-D sensing, laser-assisted data storage technology and high-speed optical interconnects.

One key new growth market could be Intel’s anticipated launch of optical “Thunderbolt” cables for consumers. The giant chip firm has been working with Oclaro on the high-speed connectors, formerly called “Light Peak”, for several years, Oclaro providing VCSELs for the technology.

Couder, who will continue as the CEO of the combined companies if the merger goes ahead as planned, also indicated that although expected annualized cost savings of around $40 million would inevitably include some site consolidation, he is not planning to shut down any of the existing five semiconductor facilities owned by the two firms.

Couder said that the five fabs, which produce the laser, amplifier and detector chips that are key to all product lines, would be closely aligned with the combined firm’s research and development efforts. The Oclaro CEO stressed in an investor call that chip-level research subsequently implemented at those fabs would be the key to improving product performance and reducing costs in the future.

Following the completion of the transaction, which is expected in around four months, Opnext shareholders will own 42% of the combined company. The company’s board of directors will feature six representatives from Oclaro, and four from Opnext.

• In early trading following the merger announcement, Opnext's stock rose by close to 50%, with Oclaro's falling by around 9%, meaning that the two companies currently have a combined market capitalization of $370 million.

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