JDS Uniphase's Capacity Expansion Claims Another Victim
By Kevin Petrie
Staff Reporter
1/18/00 8:54 PM ET
Now that it's taken its biggest bite yet out of the optical-fiber market with its $15 billion acquisition of E-Tek (ETEK:Nasdaq - news), hyperacquisitive JDS Uniphase (JDSU:Nasdaq - news) at last looks ready to digest for a bit.
In the last year the former Uniphase has morphed from an unknown maker of components for optical-fiber networks to a genuine stock to watch, one of the Nasdaq's great highfliers in a highflying time. All the while the company has had one great quest: to acquire enough breadth, and enough manufacturing capacity, to serve as the supermarket to optical-fiber users. In fact, JDS Uniphase needed so dearly to accelerate output that it was willing to pay a 66% premium.
Now that it offers the requisite supermarket of components and boasts a near stranglehold on its market, JDS Uniphase has analysts and investors forecasting a pause to integrate operations and technology portfolios, while keeping an eye peeled for futuristic technologies.
Bid It Up
Ever-supportive investors heartily supported the deal Tuesday, bidding JDS Uniphase up 3 1/2 to 195 11/16 and pumping E-Tek up 42 1/2, or 31%, to 178 3/8. There appear to be few roadblocks on the way to completing the deal: Analysts say JDS Uniphase is unlikely to draw antitrust scrutiny because market forces remain strong. Its chief competitors, Lucent (LU:NYSE - news) and Nortel (NT:NYSE - news), have chosen to farm more of their business to JDS Uniphase. If JDS Uniphase were to show monopoly power by keeping prices high, Lucent and Nortel could just retaliate by relying more heavily on their internal operations.
At the very least, this looks to be JDS Uniphase's biggest for a while. "I think that by definition the size [of deals] has to go down," says equity analyst Kevin Slocum with SoundView Technology Group. For one, few publicly traded targets remain. If JDS Uniphase were to merge with its rival SDL (SDLI:Nasdaq - news), together they might spark new antitrust worries by dominating the business of making pump lasers and modulators. Slocum says: "At this point in time, you don't want the regulators' antenna up any more than necessary."
Mike Foster, CFO of SDL, declined to comment on merger possibilities.
The Quicker Picker-Upper
Following the E-Tek deal, JDS Uniphase is finding that "very little" is missing from its portfolio of technology offerings, says Kevin Kalkhoven, CEO of JDS Uniphase. But that points to another question about a deal this big, coming on the heels of so many others: Right now, "we certainly have some work to do to absorb everything," Kalkhoven says.
Capacity expansion remains the key. By combining, Kalkhoven says, the companies are more likely to meet their goal of quadrupling capacity.
So when will investors know that the integration of Optical Coating (OCLI:Nasdaq - news) and E-Tek is complete?
"It's when our customers stop complaining in their conference calls that they are short of components," Kalkhoven says. He expects the same success he had with integrating Uniphase and JDS Fitel: Since closing the merger in June, the combined company has started to integrate technology offerings and maintained its sales-growth rate to more than 100% annually.
Third Empire
Still, even with all the typical caveats about integration issues, "I would not be surprised to see a third phase of acquisitions," says Slocum. He declined to name candidates, but observers point to a few: Sweden-based Altitun and New Focus in Santa Clara, Calif. Officials with both companies couldn't be reached for comment.
In March CoreTek in Wilmington, Mass., will introduce test versions of a so-called "tunable laser" that enables telephone and Internet carriers to adapt more quickly to changes in customer demands. JDS Uniphase "doesn't have the product we have," says Tom Dudley, vice president of marketing for CoreTek. Dudley declined to comment on speculation that CoreTek is a potential takeout candidate for JDS Uniphase.
Thanks to its frenetic acquisitions, JDS Uniphase is shopping from a position of strength. The combined operations likely will approach $2 billion in sales in 2000, according to equity analyst Charles Willhoit with J.P. Morgan. Researcher RHK estimates that segments of the optical-components industry will grow 50% annually for the next three years.
And that could mean there's a lot of buying left to be done.
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