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Lumentum acquiring Oclaro for $1.8BN

12 Mar 2018

Merger of two major suppliers of photonic components still requires shareholder and regulatory approval.

Two primary manufacturers of photonic components and modules are set to merge, with Lumentum agreeing a $1.8 billion cash-plus-stock deal to acquire Oclaro.

Financed partly with the help of a $550 million term loan and approved by both company's boards unanimously, the transaction would see Oclaro shareholders collectively own 16 per cent of the combined entity – assuming it is approved by those shareholders and regulatory bodies in the US and China.

Complementary components
Oclaro’s stock price immediately jumped in value by around 25 per cent following news of the merger, to trade just below $10 on the Nasdaq exchange. Lumentum’s stock price also rose, by around 3 per cent, in early trading following the announcement, indicating that investors welcomed the arrangement.

One of the reasons for that could be the anticipated cost savings of around $60 million per year that Lumentum says could be achieved within a couple of years of merging.

Any such savings seem unlikely to come from the research and development operations of the two firms, with both sets of executives highlighting the importance of their innovation expertise, and the great difficulty of hiring such talent in the photonics field.

They believe that their largely complementary production of photonics components and modules will help accelerate the development of future applications across communications, industrial and 3D sensing markets – estimating the current annual addressable market for the combined product line-up at $8-10 billion.

While there is some overlap in the area of modulator components, Lumentum CEO Alan Lowe said in a joint release issued by the two companies: “Joining forces with Oclaro strengthens our product portfolio, broadens our revenue mix, and positions us strongly for the future needs of our customers.

“Oclaro brings its leading indium phosphide laser and photonic integrated circuit and coherent component and module capabilities to Lumentum. The combined company will drive innovation faster and accelerate the development of products to enable our customers to win.”

Deal ‘a long time coming’
In an investor call arranged to discuss the deal, Lowe added: “This day has been a long time coming.” The CEO said that part of the motivation behind Lumentum’s 2015 separation from JDSU was to complete merger and acquisitions just like this, but that the company had thus far been distracted by internal challenges – including the recent need to ramp component production rapidly for 3D sensing applications.

His Oclaro counterpart Greg Dougherty, who has overseen a solid recovery at the firm since selling the Zurich, Switzerland, gallium arsenide laser diode business and other key assets to II-VI, added:

“Together, we will be an even stronger player in fiber-optic components and modules for high-speed communications, and a market leader in 3D sensing. This is a fantastic combination for all of our stakeholders, including stockholders, employees, customers and partners.”

While sales by the combined company will be led by telecom and datacom applications, what Lumentum expects to be a very rapid rise of 3D sensing will add balance to the application mix before long.

Lowe said that Lumentum had a full pipeline of 3D sensing chip designs ready to bring to the market, and the additional manufacturing capacity brought to the table by Oclaro would help meet the anticipated demand.

“We have a 3D sensing ramp ahead of us, and need all the fab capacity we have to be able to take on that growth,” the CEO told investors. While Lumentum’s gallium arsenide (GaAs), indium phosphide (InP), and lithium niobate capacity (LiNbO3) production is housed at the firm’s San Jose headquarters, Oclaro brings some global diversity with its state-of-the-art InP fab in Caswell, UK, a datacom-focused InP facility in Japan, and LiNbO3 modulator operations in Italy.

Oclaro recovery
Since Dougherty took over from previous Oclaro CEO Alain Couder in 2013, the company has swung from making regular losses to sustained profitability, and delivered a 22&nbs;per cent operating margin in 2017.

That progress has been reflected in Oclaro’s stock price, which was trading at just over a dollar when Dougherty took over but recovered steadily since. The company also posted what it described as "remarkable" results, including a 47 per cent rise in sales, during its most recent financial year.

“I am extremely proud of what the Oclaro team has accomplished over the last five years,” the CEO added: “We have enjoyed tremendous success and this combination will create even more exciting opportunities for the team.”

Assuming regulatory bodies do not block the Lumentum bid, and that Oclaro’s shareholders agree to it, the two parties expect to join forces formally in the second half of this year.

Once merged, the company will boast annual sales in the region of $1.7 billion, with a long-term financial model suggesting that research spending will be maintained at 11-12 per cent of that turnover as overall margins rise.

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