t2, Some more coverage of GLW and the sector...
Will Corning miss SDL?
By Phil Harvey
Redherring.com, July 12, 2000
The news that JDS Uniphase (Nasdaq: JDSU) will acquire its rival SDL (Nasdaq: SDLI) for nearly $41 billion in stock is still raising eyebrows all over the optical components industry, but especially in Corning, New York, home of Corning (NYSE: GLW). Corning had considered acquiring SDL before JDS Uniphase, but the company says it didn't make an offer because it considered the price too high.
"Corning looked into the possibility of expanding capacity with SDL," says Dan Collins, Corning's vice president of corporate communications. Corning wasn't looking exclusively at SDL, but it concluded that SDL's valuation, as well as the costs of integrating the two firms, "would not have been a value to Corning shareholders," Mr. Collins says.
There's no doubt that Corning needs SDL's technology at least as much as JDS Uniphase does. In 1999, SDL was believed to have about 40 percent of the $185 million market for 980-nanometer pump modules. Nortel Networks (NYSE: NT) and Corning, which both use components made by JDS Uniphase, accounted for about 50 percent of that market, according to a research note from Chase H & Q analyst Jeffrey K. Lipton.
It's true that SDL's technology and much-coveted manufacturing capacity for certain components would have been a great boon to Corning. But Corning can't be called a loser as long as the demand for bandwidth (and thus the components that go into building optical networking systems) is greater than the supply of cutting-edge optical components.
Corning says it will continue to look at other acquisition candidates, and it doesn't envision a JDS-SDL combination hurting its chances for growth or its current relationship with SDL.
COMPLEXITY CONSOLIDATION
Other than to keep SDL away from Corning, here's why JDS Uniphase is after SDL: SDL is known for its 980-nanometer pump lasers. Pump lasers -- which send data as beams of light -- are a main component in optical amplifiers. Optical amplifiers keep the light beams that travel across a network from reducing in strength or separating. In other words, amplifiers help prevent data from getting lost as it moves from place to place.
The optical bits and pieces manufactured in large volumes by companies such as JDS Uniphase, SDL, and Corning are bought for use in optical networking systems built by companies such as Cisco, Lucent, Alcatel, Ciena, and Nortel. The long-term goal of the systems companies is to create optical networks where data can move quickly across great distances, thus enabling incredible amounts of bandwidth and spawning new kinds of businesses and services for businesses and end users.
The reason firms in the optical components sector have been combining with such frequency (and at such incredible valuations) is twofold. First, optical components are increasingly difficult to manufacture, companies such as JDS Uniphase need all the manufacturing capacity they can get. Taken together with its recent E-Tek acquisition, JDS Uniphase currently has about 3.8 million square feet of manufacturing capacity, and it employs some 17,000 people. SDLI has about 600,000 square feet of manufacturing capacity and about 1,700 employees.
The second reason such mergers occur is that, because of the highly complex nature of optical components, broadline suppliers such as JDS Uniphase can't expect each one of their components to be the best of its breed. This is the reason JDS Uniphase would seek to buy a firm that is focused on making just a few things well, such as SDL.
STILL A CUSTOMER
Besides the optical components industry's fever to consolidate, Corning isn't going to wither and die just because it wouldn't fork over $40 billion for SDL. Optical systems makers will continue to want more than one supplier for their components, and Corning will still sell to, buy from, and compete with several firms simultaneously.
For example, although Corning makes some pump lasers in its Lasertron facilities, the company expects to continue to use SDL as one of its pump laser suppliers. It will also keep buying chips from JDS Uniphase so that it can make its optical amplifiers (JDS Uniphase also makes optical amplifiers).
Corning, of course, sells its optical amplifiers to firms such as Lucent, Nortel, and other firms that compete with each other. And aside from what it makes at its Lasertron facilities and buys from SDL, Corning also buys a good deal of its pump lasers from Nortel.
Indeed, Lucent and Nortel not only make optical systems, but they manufacture their own components as well. At any given time, optical systems makers and independent components makers are leapfrogging each other with technical advances. The general shortage of optical components also adds to the willingness of these firms to buy and sell each other's products.
WE'RE STILL STANDING
Aside from Corning's participation in the components orgy, it is still, for better or worse, a widely diversified firm. It lumps its businesses into three categories: telecommunications, advanced materials, and information display. (Corning President John Loose couldn't speak with Redherring.com for this article because he was said to be traveling in Korea, tending to the firm's info display business there.)
It's interesting to note, though, that an increasing percentage (now some 70 percent) of Corning's revenues come from its telecommunications division, which includes the firm's photonics technologies business.
Earlier this year, Corning executives said that revenues from its photonics business, the unit selling optical amplifiers, among other things, would increase 80 percent by the end of 2000. However, the company won't go so far as specifying a projected revenue amount for that division.
BIGGER THAN US ALL
It is safe to say that JDS Uniphase dwarfs Corning (as well as the dozens of optical components startups) in terms of its size and breadth. In 1999, Corning's revenues, across all its businesses totalled $4.7 billion. If the Feds allow JDS Uniphase to combine with SDL, the new firm will have an annual revenue run rate of about $2.7 billion, according to analysts.
But the optical components market is larger still. Telecom market researcher Ryan Hankin Kent says the worldwide market for optical components is expected to grow from $6.6 billion in 1999 to over $23 billion by 2003.
So although the JDS-SDL combination will be staggering in size, consolidations across the industry will continue, and each respective firm is growing its manufacturing capacity as quickly as its cash allows. In fact, it was just weeks ago that Corning announced it would spend $50 million to add plant capacity and 700 jobs in its Erwin, New York, photonics facility.
Although SDL was too expensive for Corning, its miss there won't slow Corning's search for complementary technologies and greater manufacturing capacity. Now that it's clear where Corning's headed, we'll be watching to see if it cozies up to Pirelli, Furakawa, or Multiplex in the coming months.
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