Shaking Up The Component Tree Avanex, Oplink Merge To Take Aim At JDS Uniphase
Apr 08, 2002 (Fiber Optics News/PBI Media via COMTEX) -- Not every company is cut out to be the leader in their industry. Some people don't want the pressure and expectations that go along with being the top dog. Oplink [OPLK] CEO Fred Fromm is not one of those people.
At Oplink, Fromm has had to look up to JDS Uniphase [JDSU], the undisputed leader in optical components. Now that Oplink will merge with Avanex [AVNX], Fromm says he has the firepower to take dead aim at JDS.
"We're not satisfied to be No. 2," Fromm says. "But given our size and our position right now, that's the entry point. We will position ourselves as an alternative to JDS and will build on that."
Avanex and Oplink were previously competitors, but plan on combining their strengths. Avanex brings expertise in photonic processing subsystem and module systems, while Oplink has a following for its optical modules and components.
The all-stock Avanex-Oplink merger was valued at about $610 million when it was announced on March 19, and is expected to close by June 30. Oplink shareholders will receive 0.4 of an Avanex share for each of their shares.
Both companies were born during the wave of fiber frenzy, and rode that hype to outlandish stock prices. Avanex, founded in 1997, went public in February 2000 and saw its stock hit a high of $273.50 by March of that year. One year later it was trading under $10, and now is in the $3 range.
Oplink was founded in 1995, went public in October 2000, and saw its stock hit a high of $40.81 that month. The stock has been trading in the $1 range for the past eight months.
The combined company will be called Avanex, and Paul Engle, Avanex president and chief executive, will retain this role in the combined company. Fromm will be a member of the board.
Both companies have rolled up significant debt. As of Dec. 31, 2001, Avanex has an accumulated deficit of $249 million, and Oplink has an accumulated deficit of $165 million. Of course, JDS has accumulated debt of more than $60 billion, so maybe Avanex and Oplink aren't so bad off.
The combined Avanex-Oplink company expects to realize cost savings of about $15 million in the first full year after the transaction, and are hoping their combined cash hoard of about $400 million will be enough to acquire more technology.
There's Strength In Numbers
Fromm says Avanex and Oplink could have survived independently.
"We both had excess of $200 million in cash, and we both had our cash burn rate approaching break-even," Fromm says. "Even in a worst case of $10 million a quarter run rate, or $40 million a year, you still have ample runway - - three, four years -- before you have a sustainability problem."
However, Fromm says with the uncertainty of the market, the cash wasn't enough for Avanex or Oplink to invest in new technology. Now he can go shopping - carefully.
"We will be able to continue and increase some of our investment in product development and maybe technology acquisition, especially as some of these interesting technology companies run out of runway," Fromm says. "We're going to carefully look at where the opportunites are and where the gaps are in our portfolio."
Since Avanex and Oplink both produce passive optical components, they would likely be interested in acquiring an active component company such as New Focus [NUFO] or Bandwidth9 to fill out their product line. Fromm confirms that Avanex-Oplink will look at acquiring active technology, but also says it's not out of the question that more passive technology may be added.
It would be nice if Fromm could get any kind of guidance from systems vendor customers about what components they might need to buy, but that won't happen as long as they are in the dark about what their carrier customers will spend.
However, Fromm has hope that an imminent "bandwidth collision" could spark the industry.
"The demand for services continues to grow, but the carriers are not deploying significant new networks," Fromm says. "Even though there has been an overbuild in the past, we believe there are certain areas that are beginning to choke. We think this chokepoint will hit and it will eventually re-stimulate network builds, both in the long haul where it has been traditionally, but also in the metro access to remove the bottlenecks that are currently there."
But when will this happen? Of course like everyone else Fromm can't say for sure, but his best guess is perhaps in a year ... or in two years ... or actually perhaps in three years. Fromm says you won't be able to predict the rebound until carriers make major commitments to substantial programs.
"We're waiting for an SBC [SBC] to say 'We've come up with a metro architecture that we are going to start rolling out in our top 30 markets. And our vendors are Lucent [LU], Nortel [NT] and Siemens [SI],'" Fromm says. "When those types of things happen, we'll start to see visibility because meanwhile, we're working with Lucent, Nortel and Siemens and others in helping them design their products with our technology."
Entering The Forest, Loaded For Bear
It will likely take some acquisitions for Avanex-Oplink to pose a serious threat to JDS' component leadership. But Fromm, 51, is used to working for companies that shoot for the top. He began his career at Bell Labs, then spent 21 of his 30 years in the industry with Siemens, where he eventually became president and CEO of subsidiary Siemens Information and Communications Networks. He also served on the board of directors of Siecor Corp., the joint fiber optic cables venture of Siemens and Corning [GLW].
Now he will help focus Avanex-Oplink on dethroning JDS. He says there are weaknesses at JDS that can be exploited.
"We certainly see opportunites to outperform them both technically and from a customer service point of view, in various parts of the market," Fromm says.
That will be an onerous task. RHK Analyst John Lively says JDS has actually gained market share during the market downturn of the last 12 months.
"We attribute that to the fact that JDS has a very broad product line, and a broad customer base," Lively says. "They're not focused on a single market or a single high-flying customer. Going forward, that's going to be really important. They're in good position, the market is theirs to lose right now."
Avanex got 77 percent of its revenue in fiscal 2001 from Fujitsu, Nortel and WorldCom [WCOM]. Oplink's top customers are Lucent and Siemens, but it also gets a solid chunk of its revenue from smaller companies.
Stephen Montgomery, analyst for ElectroniCast, says Avanex-Oplink should be able to gain market share in the customized component industry. This industry is driven by smaller companies that want their components customized, a process that really isn't worthwhile for bigger companies like JDS to pursue. JDS sells more of a commodity-type product, where they make and sell what their big customers tell them what they want.
"A big chunk of Oplink's revenues come from customized products," Montgomery says. "I would think that Avanex is the same, so I would think that they would complement each other to compete in the smaller niche market. But at the same time they could expand to do business on a larger quantity basis at a much better price than JDS. That would be their main differentiation."
Gerald Gottheil, JDS director of corporate marketing, says JDS has no comment on the Avanex-Oplink merger.
Since Oplink's primary manufacturing facility is in Zhuhai, China (the company also has a research and development facility in Shanghai, China) they can compete fairly well in price with JDS, Montgomery says.
Fromm says although JDS owns the vast portion of the industry, Oplink has won the lead position in projects at Lucent, and Avanex has won lead shares in projects at Cisco [CSCO].
"The big thing with JDS is they are known as the company that is up there by themselves in quality and performance," Montgomery says. "So a lot of people are intimidated by that. This merger is at least going to make Avanex and Oplink stronger, and will pose more of a threat to JDS than they were before. JDS may not feel threatened at this point, but I'm sure they're aware of it."
(Gerald Gottheil, JDS Uniphase, 408/546-4400; John Lively, RHK, 607/562- 3838; Stephen Montgomery, ElectroniCast, 650/343-1398; Teresa Novak, Oplink, 408/965-7225)
Fiber Optics News, Vol. 22, No. 14
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