JDS Uniphase Well-Positioned to Weather Recession after Spectacular Fall
Apr 07, 2002 (San Jose Mercury News - Knight Ridder/Tribune Business News via
COMTEX) -- "Technology is a surfing business. Catch the wave and you ride it. .
. miss the wave, you get swamped." -- Jozef Straus, Chief Executive Officer, JDS
Uniphase, 2000
JDS caught its wave, all right.
But the ride was as brief as it was thrilling, and it left shareholders
drenched.
The company, which builds lasers and other components for fiber-optic
communication networks, was an acquisition machine through the late 1990s,
building manufacturing muscle to meet unprecedented demand during the Internet
boom.
By 2000, JDS, which has dual headquarters in San Jose and Ottawa, had become the
undisputed giant of a market that had customers begging for products. But a year
later, as the Internet boom faded and the economy soured, JDS suffered a
nosedive that was stunning even by recent Silicon Valley standards.
Just as JDS was closing its largest deal -- the purchase of San Jose's SDL,
initially valued at $41 billion -- the economy came crashing down, forcing the
company to spend the next year dismantling most of the capacity it spent
billions of dollars to acquire. Sales plunged -- from $925 million in the last
three months of 2000 to $286 million a year later.
JDS wrote off a mind-bending $50 billion in goodwill from its books last year, a
move widely regarded as proof that it had vastly overpaid for at least some of
the companies it bought. Nearly two-thirds of the 29,000 workers JDS employed
last April are gone; nearly 20 factories around the world are shuttered or soon
will be.
JDS is now an echo of its ambitious dreams.
Today, the company waits. "We just know that at some point people are going to
start buying again," said chief operating officer Greg Dougherty.
But how much, or why, or when? Industry analysts are talking years.
Amid the thousands of high-tech companies whose fortunes soured last year, JDS'
rise and fall were exceptionally dramatic, propelled by grand ambitions and
intensified by the company's position, as a components maker, at the bottom of
the technology industry food chain.
The opportunity that shot JDS into the spotlight followed years of obscurity.
Component-making is a physicist's business in which buzzwords come from the
elements and phenomena that make the devices work; erbium-doped fiber, raman
amplifiers, dense wave division multiplexing only enter the popular vocabulary
when people see them as avenues to riches. Lasers and components to manipulate
light have applications in medicine, space, research and other fields.
But Straus, a Czechoslovakia-born physicist perhaps best-known outside the
technical world for his ever-present black beret and a tendency to quote from
"The Little Prince", saw the most potential in the high-speed Internet.
Long-distance telephone companies used fiber-optic networks to carry voice
conversations; the implications for carrying vast amounts of data were even
greater.
JDS, which Straus co-founded, specializes in making high-end components for the
longest, most robust networks, built by companies including Nortel Networks,
Alcatel and Lucent Technologies for a host of new telecommunication carriers.
Demand for JDS' products was so high that its customers stockpiled hundreds of
millions of dollars worth to ensure a steady supply during the Internet
build-out.
JDS expanded to gain the manufacturing muscle to fill those orders, announcing a
dozen deals between 1999 and 2000, culminating in the SDL purchase.
Service providers' funding abruptly dried up last year, forcing several major
ones to shut down or file for bankruptcy, and fears of a "fiber glut" led many
to question the need for more networks. JDS' customers no longer needed all the
parts they had agreed to purchase and had little reason to buy more.
"JDS could be making the best integrated module on the face of the planet and
could be giving it away and there still might not be demand," said Joseph Wolf,
an analyst at UBS Warburg.
By the time the SDL acquisition closed in early 2001, JDS' share price was well
into its collapse, at $52, down from $116 when the deal was announced. It trades
in the $5 range today. And that fall cut the value of the SDL acquisition by
more than 50 percent, to $18 billion.
JDS chief financial officer Tony Muller defends the amount JDS bid for SDL --
two other firms were also trying to buy the company -- and he says JDS might
have lost more ground had it passed on the acquisition. In SDL, JDS gained pump
laser technology (among other things) that helps amplifiers strengthen and
regenerate signals over long distances -- an important component in long-haul
networks.
"At the time, they didn't seem to be unreasonable acquisitions," said Jeremey
Donovan, chief analyst for Gartner Dataquest, a technology market research firm.
"Had the market continued to go gangbusters, the same people who are critical of
JDS' acquisitions would be taking the opposite side."
Accounting rules still required the company to book the value of the acquisition
at $41 billion. JDS wound up writing off most of that, plus billions more
related to its earlier acquisition of E-Tek, another San Jose component maker.
However valuable those companies may have seemed at the time, the worth was
fleeting, and JDS' ambitions were bigger than the market it geared up to serve.
"They were exposed to the fastest, most out of control market -- both on the
upside and the downside," Donovan said.
Ironically, the company might be better off today if it had not been so focused
on beefing up when customers demanded more capacity. "JDS met customer demand
way too well," said analyst Wolf. "If it had just said no...but you can't say no
because your customers are demanding it and if you can't supply it, somebody
else will."
The downturn has emptied JDS offices and changed the character of the company.
At an SDL plant in San Jose, where 1,000 people worked in three shifts, the
problem was parking: employees might have to walk several blocks along dark
streets.
Today, only about 400 people work there, and many of the microscopes for
assembling and testing components sit unattended.
In all, JDS cut 18,000 jobs, leaving 11,000 workers today.
Executives now acknowledge that JDS chased opportunities at the expense of
financial discipline. Some units "were just running after the opportunities and
the volume," says Dougherty, who joined JDS in the SDL acquisition. "They didn't
have the experienced management teams that had seen it done at a bigger
company."
Analysts say SDL's management team, including Dougherty, was one of the lasting
positives of that acquisition. JDS paid a high price for the expertise,
including a $75 million cash bonus for Dougherty and $46 million more to pay his
taxes last year.
Late last year, amid the cutbacks in its core business, JDS agreed to pay up to
$425 million for a unit of IBM that sells to corporate customers, which have
reduced purchases less sharply than telecom service providers. The IBM business
will give JDS nearly $20 million in revenue this quarter. But in the short-term,
the outlook for JDS as a whole looks dim.
JDS said in January that it expects sales to fall again in the current quarter
ending Mar. 30, to between $261 million and $276 million. But analysts widely
expect JDS to miss its forecasts once again. Despite all the cutbacks, most
analysts still expect the company to lose about 1 cent per share, or $20
million, before one-time items such as restructuring costs.
Longer-term, most analysts continue to believe that some application -- a next
Napster -- will kick-start demand, or that growth in urban networks will
eventually lead to the need for more upgrades.
And JDS, more than its smaller competitors, is in a better position to wait out
the downturn, analysts say.
"What Intel is to microprocessors, they were to optical components," Donovan
said. "It will mean something in two or three years again."
By Jennifer Files |
