Pass Pass --
I agree IPOs generally have a rocky start, but six months is a long time when you consider how rapidly the fiber optics sector is growing. We know about Moore's Law. Perhaps someone should develop a formula that equates photonics' growth to multiples of projected revenues as well as manufacturing and certification status. Assuming, of course, we're talking about advanced technologies. SDLI is gaining new attention based in part on its first-to-market Raman lasers and more recently on its acquisition of PIRI, a leader in Arrayed Wave Guide (AWG) technologies.
Leap-frogging the competition is critical but to succeed, a company has to be first-to-market, and that means manufacturing processes that are certified. Not easy. JDSU's merger prospectus indicates they're struggling with their lines in the Netherlands. That equates to an Olympic runner stopping to tie his shoes.
Stocks like NUFO, AVNX, and ONIS, are difficult to value in part because there's no formula for analyzing companies in this sector.
One of the primary reasons Lucent snapped up Ortel was for its manufacturing:
lucent.com
It was also one of the stated reasons JDSU is taking out ETEK.
This is a long way of saying it's important to look beyond a company's products to its ability to bring them to market before the competition.
Most industries have seen size dominate --- and thus the term "Gorilla Game." In photonics, the key factor is competence (leading technology, certified manufacturing, early design wins), and unlike any industry I can think of, Goliath's size is no match for David's competence. The Goliaths of the world know this and have responded by buying up all the Davids they can find. Not the first, but certainly the first of its size, was Cisco's take-out of Cerent. Since then the game has escalated to where many young companies are being bought before they go public --- at prices they hoped to garner on the public market. Davids are calling the shots and Goliaths all around the globe are ponying up because they know they can't survive without the competence these companies bring.
Avanex's Achilles Heel is Fujitsu. Their licensing agreement precludes anyone owning more than 50% of the company. ONI may have several Achilles Heels, but apart from the enormous number of shares outstanding, the Nortel agreement is one of the more notable.
New Focus falls into a slightly different category primarily because it's an established company with over ten years in the industry. I don't know if anyone tried to take them out before the IPO, but it's obvious they were willing to risk getting a better valuation in the public market. And, most notably, they are the only one of the three to have Telcordia certified products already shipping. It could be argued NUFO's current valuation makes them an unlikely take-out candidate, but I would counter that companies shoppping for acquisitions are using inflated currency, so it's a wash.
A quick comparison of the three:
Name Mkt Cap S/O Float Sales S/share P/B P/S
NUFO $4.2B 58.3M 5M $27.9M 8.39 28 8.58
AVNX $5.71B 64.2M 13.5M $21.9 0.65 22.18 137.86
ONIS $9.91B 123.9M 8.0M $6.10 0.26 35.53 306.55
[all stats from Yahoo!]
A few acquisition statistics:
1) Ortel:
February 7, 2000 . . . Under the terms of the definitive merger agreement between Lucent and Ortel, each share of Ortel will be converted into 3.135 shares of Lucent. Based on Lucent's closing stock price of $57 on February 4, the acquisition would be valued at approximately $2.95 billion, or $177.125 per Ortel share, on a fully diluted basis. . . .
February 22, 2000. . . For the current third quarter, revenues totaled $21.4 million . . . Income from continuing operations for the third quarter totaled $735,000, or $0.05 per diluted share, compared with a loss from continuing operations a year ago of $492,000, or $0.04 loss per share.
2) Cerent:
August 26, 1999 . . . Under the terms of the Cerent agreement, 100 million shares of Cisco common stock will be exchanged for all outstanding shares, options and warrants of Cerent not currently owned by Cisco. Based upon Cisco's August 25, 1999 closing price of $68.625, the stock exchanged would have a value of approximately $6.9 billion. This acquisition will be accounted for as a pooling of interests and is expected to close in the first half of Cisco's fiscal year 2000.
Cerent's S-1, filed before being taken out:
sec.gov
For the 6 mos. ending June 30, '99, they had $9.9M in revenues and $29M in losses.
3) Xros
June 2, 2000 . . . As a result of the acquisition, Xros became a wholly-owned subsidiary of Nortel Networks and each outstanding share of Xros preferred stock and common stock was converted into a right to receive 3.0780 Nortel Networks common shares, for a total of approximately 53 million Nortel Networks common shares. Approximately 2.1 million Nortel Networks common shares were reserved for issuance in respect of Xros options assumed by Nortel Networks. The acquisition was effected by the merger of a wholly-owned subsidiary of Nortel Networks with and into Xros. . . .
In November of 1999, Xros had received a total of $25 M in start-up funding: xros.com
Part of their value comes from their chief architect: xros.com
4) Altitun:
newsalert.com
. . . ADC will issue approximately 15,227,000 shares of its common stockto Altitun's shareholders and optionholders in the transaction. Based on ADC's closing share price of $57.25 on May 4, 2000, the proposed acquisition is valued at approximately $872 million.
5) PIRI:
SAN JOSE, Calif., May 10 /PRNewswire/ -- SDL, Inc. (Nasdaq: SDLI) announced today the signing of a definitive acquisition agreement with the shareholders of Photonic Integration Research, Inc. (PIRI) valued at $1.8 billion. PIRI, a privately held company located in Columbus, Ohio, is a leading manufacturer of arrayed waveguide gratings (AWGs) that enable the routing of individual wavelength channels in fiber optic systems. These products are used in optical multiplexing (mux) and demultiplexing (demux) applications for dense wavelength division multiplexed (DWDM) fiber optic systems. The acquisition expands SDL's traditional role as a leader in active components in fiber optic systems to that of a leader in advanced passive components. Further, the acquisition of PIRI responds to the needs of SDL's customers going forward, by adding a critical silicon wafer based optical integration technology which is expected to improve performance and lower costs in next generation DWDM systems.
The acquisition agreement provides for a $31.25 million cash payment and the issuance of approximately 10.2 million shares of SDL, Inc. stock, based on the May 9, 2000 SDL closing stock price, in exchange for all of the stock of PIRI; the exact number of shares will not be determined until closing. Completion of the transaction is subject to customary closing conditions, including government and regulatory approval, and is expected to close by the end of the second quarter. The transaction, excluding acquisition-related charges and amortization of intangible assets, is expected to be accretive from the date of closing.
[Compare with ETEK's announcement on Friday re: AWGs, ". . . available now in sample quantities for the 40-channel, 100 GHz model from E-TEK representatives worldwide. Pricing and lead times for customers requiring product customization and larger quantities will be provided by E-TEK representatives." And from PIRI: piri.com
piri.com
A little digression. Looking over PIRI's website, I found the following on testing:
V Qualification Testing
Reliability requirements and standards for passive optical circuits are described in various documents available from Telcordia Technologies (formerly Bellcore). In January 1999, PIRI began qualification tests on 40-Channel AWG modules based on the requirements outlined in GR-1209 (Generic Requirements For Fiber Optic Branching Components), along with some elements of GR-1221 (Generic Reliability Assurance Requirements for Passive Optical Components). The test program consist of short term sequential tests of 11 modules:
In addition to the 11 modules under sequential testing, another 9 modules were placed in long-term tests: Thermal Aging (3 modules); Damp Heat (3 modules); and Temperature Cycling (3 modules).
As of May 20, 1999, all sequential tests have been completed, and the long-term samples have approximately 2500 hours under test conditions. No test related failures were identified. A final report will be available in August 1999. . . .
>>>>>
I guess it's appropriate to end my rambling right in my favorite backyard: SDL.
Incidentally, Brogan's Signal Report on RadioWallStreet reports that SDLI is among their top picks and still hasn't reached their price target. radiowallstreet.com
Okay, time to do some real work. . .
Pat |
