JDSU/SDLI--JDS/SDL merger could be in home stretch
By Eric Moskowitz
Redherring.com, December 14, 2000
Current comparison chart
Quote & Chart for: JDSU SDLI FUWAY
When JDS Uniphase (Nasdaq: JDSU) announced in July that it intended to acquire SDL (Nasdaq: SDLI) to expand greatly its optical component business, few thought the deal would sail through scot-free. And although a lot has changed since July (namely the value of the deal, which has plunged from $41 billion to $22.2 billion due to a steep drop in JDS's stock price), shareholders of both companies are likely to approve the merger at meetings on December 27. Before the agreement can be consummated, however, there could be one final wrinkle.
Analysts say the Federal Trade Commission (FTC) has been looking into JDS's ownership of a plant in Zurich, Switzerland, that makes 980-nanometer pump lasers, which boost the speed of optical signals as they travel along a fiber-optic network. SDL also happens to make a lot of 980-nanometer pump lasers, and the two companies control 70 to 90 percent of the entire pump laser market, according to UBS Warburg analyst Joseph Wolf. And the fact that the duo are the No. 1 and No. 2 makers of optical components for the telecom industry may make the FTC want to scream, "Monopoly!"
But it looks as if JDS should have no problem getting approval for its merger. We certainly don't expect the FTC to have has many quibbles with this deal as there have been with some other technology mergers, most notably the still-pending deal between America Online (NYSE: AOL) and Time Warner (NYSE: TWX). In fact, Mark Langley, a senior analyst at Epoch Partners, sees a way for JDS to divest itself "elegantly" of this potential antitrust hurdle.
"There is no question that the Zurich plant is valuable, but the real issue is, who would JDS let buy it?" asks Mr. Langley. He sees Japan's century-old Furukawa Electric (Nasdaq: FUWAY) as an ideal candidate, since it owns 8.9 million JDS shares, worth nearly $6 billion, and is not a direct JDS competitor. Since he estimates the Zurich plant is worth around $4 billion to $6 billion, JDS could buy back a majority of Furukawa's JDS stake, which the Japanese company has been gradually selling anyway. A JDS spokeswoman declined to comment.
Furukawa makes electrical wire, cables, and aluminum cans, and more importantly, lots of fiber-optic products -- it told analysts on November 27 that it expects to produce $2 billion in optical components for its fiscal year ending March 2001. Its stock has doubled this year but is down 22 percent from a high of $338 on October 23.
Mr. Langley adds that the government is more likely to approve a sale to Furukawa than one to other big U.S. optical components companies. "If JDS sells the plant to Lucent Technologies (NYSE: LU) or Corning (NYSE: GLW), you catch the eye of the Department of Justice because they both also make 980s," notes Mr. Langley. Furukawa makes 1,480-nanometer pump lasers, but not 980-nanometer lasers. So a deal between JDS and Furukawa would be relatively simple and probably would satisfy the government. But the question now is whether or not JDS will have to sell the plant in the first place.
FTC FEELING GENEROUS
Some analysts are saying that the FTC may not force JDS's hand on the Zurich plant after all. "We always expected that the FTC would force JDS to get rid of the plant," says Wit Soundview's Nick Desin. "But now we're hearing the FTC may let it slide." An FTC spokesperson said the agency hadn't filed anything involving the JDS/SDL merger, and the Department of Justice didn't return calls for comment.
Investors are betting that the deal will soon be approved with very few concessions as well. SDL's stock has edged up 42 percent between November 30 and December 12. It's worth noting, however, that the FTC can still ask for concessions after shareholders approve the deal.
And once the merger is finally completed, we expect JDS to continue its acquisition spree. JDS is perhaps the best example of a company that has bought its way to the top of its business, other than Cisco Systems and, until this past summer, Worldcom. At JDS's shareholder meeting on December 27, management will seek approval to double its shares outstanding, a clear indication it's not done stock-swapping for new technologies.
JDS traditionally has used acquisitions in order to boost its heft in the optical components area -- and attract even more interest from investors in the process. JDS agreed to purchase E-Tek Dynamics for $17.4 billion in January, and its stock promptly doubled in value by March. Of course, that coincided with a broad rally for technology stocks in what turned out to be the Nasdaq's peak point for the year.
Over the last three months, JDS's market cap has been chopped in half. Nonetheless, the stock still trades at a healthy price-to-earnings ratio of 82 times fiscal 2001 estimates. The company is still growing rapidly, with earnings expected to increase by 93 percent in fiscal 2001. But it is JDS's penchant for making deals that has enabled earnings growth to be as strong as it has been.
JDS will need a high stock valuation to continue its game of growth and quest for domination of the optical components market. And once the JDS/SDL deal is done, we expect to see renewed bullishness in the company's stock and, in turn, more acquisitions. |
