This is an interesting article from today that once again illustrates that those in the fiberoptic field should be very well rewarded this year, either through a buy out or simply by having the market drive the stock price. Maybe you all can read between the lines:
Corning wants to turn glass to cash
By Phil Harvey
Redherring.com, February 17, 2000
Corning (NYSE: GLW) is probably best known for its casserole dishes. But the giant glass manufacturer, which has embarked on an ambitious acquisition strategy, wants to be just as much of a household name in optical communications.
Corning has shed stagnant businesses, such as its housewares business, to focus on helping quench the world's insatiable thirst for bandwidth. In doing so, Corning is throwing billions of dollars into acquisitions and other deals to help grow the optical communications business. It -- and its competitors -- have the eye of Wall Street and the venture community, as observers wonder which optical startups will be snapped up next.
Today Corning concentrates on three broad businesses: telecommunications, advanced materials, and information display. In addition to making glass for TVs and computer screens and making polymer products for biotech companies, Corning is one of the world's top producers of fiber-optic cable. It holds about 40 percent of the global fiber market, twice that of its nearest competitor, Lucent Technologies (NYSE: LU).
Corning is betting that its telecommunications business, which includes fiber and optical communications, will be a source of steady growth in the next few years. The division already makes up more than half of the company's sales. For the nine months ending September 30, 1999, Corning's total revenues rose 19 percent to $3.1 billion. Since the company accelerated its optics business, its stock has risen from its 52-week low of about $47 to close at $178, up $2.25, on Wednesday -- just below its high.
PICK UP THE PIECES
While the optics business is serving it well, Corning now finds itself in a bit of a bind. As a provider of optical components to companies such as Lucent and Nortel Networks (NYSE: NT), Corning now must decide whether it should assemble those components and sell complete optical systems to telecoms. "What's to stop them from taking the next logical step and putting all the pieces together?" asks Kenneth Kelly, senior analyst at market researcher Dataquest.
At the same time, Corning can't wait too long to make that decision. Its largest competitor, JDS Uniphase (Nasdaq: JDSU), is also in the midst of an acquisition frenzy for optical components companies. Such components firms make the optical filters, pump lasers, optical amplifiers, and other widgets that make up the transmission equipment that runs optical networks.
Corning isn't standing still. It said this week that it will buy Netoptix (Nasdaq: OPTX) for more than $2 billion in stock. Netoptix makes optical filters used to increase the capacity of optical fiber.
Analysts praised the Netoptix purchase. "People haven't been able to produce enough filters," says Richard Faust, a senior equity analyst with Adams Harkness & Hill. "It seems Netoptix has made a breakthrough in manufacturing. Their yields are four times that of the rest of the industry."
With Netoptix, Corning will supply parts to Samsung Corning Micro-Optics, a new joint venture of Samsung Electronics and Corning that was announced this week. Samsung Corning Micro-Optics will make dense-wave division multiplexing (DWDM) components in a facility in Suwon, South Korea. (DWDM increases the capacity of fiber by transmitting signals through the same fiber at different wavelengths.)
Adding to Corning's bounty this week was its $66 million acquisition of British Telecom (NYSE: BTY)'s Photonics Technology Research Center, which has spent $300 million over 15 years developing and acquiring intellectual property related to optical component technology and optical systems.
ROCK THE BOAT
Corning's new purchases appear to put it on track to compete directly with its customers. If it decides to make optical networking systems in addition to components, it will go head to head with Lucent and Nortel, the giants that supply optical networking gear to companies such as AT & T (NYSE: T) and Qwest Communications (NYSE: Q). That would definitely be a daunting task for Corning, which doesn't have comparable name recognition and resources.
Still, some feel Corning could use its leverage as a fiber supplier to help it get a foot in the door. Dataquest's Mr. Kelly suggests that Corning might say to telecoms, "You're already using my fiber, why don't you let me demonstrate what I can do on a systemwide basis?"
Such a move would, of course, add tension to Corning's relationship with Lucent, which competes with Corning in the fiber market. But that kind of situation is par for the course in the telecommunications business, says Dan Dileo, president of Lucent's optoelectronics division. "As weird as it sounds, it's pretty normal," he says.
DANCE WITH ME
It remains to be seen whether Corning will decide to move against Lucent and others. The company ignored Redherring.com's repeated requests for interviews.
In the meantime, the demand for optical networking components is rising and, thanks to the pace of acquisitions, the number of companies in the space is shrinking. Nonetheless, large suppliers like Corning and JDS will continue to look at technologies that help cram more and more data down a single strand of fiber.
Industry observers say it would make sense for Corning to buy a company with DWDM software expertise if it decides to get into the systems business. That could take it into a fast-growing market: Dataquest predicts that the U.S. DWDM equipment market will grow from $2.8 billion this year to $3.8 billion by 2003.
Among the companies that Corning may try to acquire are Sweden's Altitun; Santa Clara, California-based New Focus; San Jose, California-based Lightwave Microsystems; ITF Optical Technologies of Quebec; Sunnyvale, California-based Alliance Fiber Optic Products; Fremont, California-based Wavesplitter; Richardson, Texas-based Chorum Technologies; Wilmington, Massachusetts-based CoreTek; and PIRI, a joint venture of NTT (NYSE: NTT) and Mitsubishi located in Colombus, Ohio.
Those companies may be itching to sell after seeing the premium prices Corning is willing to pay. After Corning said it would acquire Netoptix, Netoptix's shares rose $20 to $156 on Monday.
JDS is also playing the aggressor. Earlier this month, it bought Optical Coating Laboratory in a deal valued at more than $2 billion. In addition, JDS said last month that it would buy Corning rival E-Tek Dynamics (Nasdaq: ETEK) for $15 billion in stock.
THE LOVE'S STILL GROWING
The shrinking number of suppliers doesn't necessarily mean that competition between smaller suppliers and roll-up artists such as JDS and Corning will push the small fry out of the market. The consolidation is, after all, coming from the need to grow, not because there are too many suppliers.
"We're moving to a pretty short list of broadline suppliers outside the captive activities of Nortel and Lucent," says Kevin Slocum, a managing director at investment bank Soundview Technology Group, which is merging with Wit Capital (Nasdaq: WITC).
"I wouldn't be quaking in my boots if I were a component maker with an interesting product," Mr. Slocum says.
Even Lucent and Nortel, which manufacture many of their own optical components, rely on JDS and Corning as a secondary supplier for critical components. That creates an opportunity for smaller suppliers to step up to be the "second source."
Sheau Chen, CEO of component supplier Wavesplitter, is counting on that. He says the innovation bottleneck isn't going to be solved by megamergers. "There's still a requirement for improved manufacturing and improved component technology," Mr. Chen says.
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