Glenn,
Hope the new business is going well!
From the Fool Boards:
Unite and Conquer
When Jozef Straus cold called Kevin Kalkhoven in the summer of 1998 to
suggest merging their companies, he was pretty sure Kalkhoven would
recognize a strategic benefit from the marriage. JDS Fitel Inc., the Nepean, Ont.,
company Straus headed, had sales of $456 million in the fast-growing fibre-optics
industry. Kalkhoven's company, San Jose, Calif.-based Uniphase Corp., which
was in the same industry, posted $283 million (U.S.) in sales. Wedded, Straus
calculated, the two could easily exceed the sum of their parts to become a
billion-dollar company. What worried him, though, was the possibility that
management incompatibility might scupper the deal. So Straus devised a
strategy to pre-empt the problem: He proposed that he and Kalkhoven go hiking
alone in the Rockies to get to know each other and discuss their firms' future.
Straus had good reason to wonder if he and Kalkhoven would hit it off. Kalkhoven,
55, is an extroverted Australian-born marketing specialist who pilots his own
twin-engined Cessna and lists scuba diving and skiing as pastimes. Straus, a
53-year-old research physicist who emigrated from Czechoslovakia 30 years ago,
is considerably more low-key. He is not, however, without idiosyncrasies. He
regularly holds business meetings at McDonald's, for instance, and favours a
trademark black beret and a watch on each wrist, one set to his current time
zone and one set to the city he is headed to next.
As it turned out, Straus's concerns were groundless. Kalkhoven's enthusiastic
acceptance of Straus's invitation was the first hint that things would go smoothly.
They got along famously on a three-day trek in Yoho National Park's
backcountry. By the time they came down from the mountains, they'd cemented
plans to merge Straus's JDS Fitel with Kalkhoven's Uniphase Corp. to create
JDS Uniphase Corp.
The size and symmetry of the deal announced in January caught the fancy of
analysts. They resoundingly blessed it as a union of equals. Investors responded
in kind. Over the next six months, they doubled the stock price of both JDS Fitel
and Uniphase. By the time shareholders approved the merger – almost
unanimously – last June, the deal was valued at $4.7 billion, second in Canadian
high-tech history only to Nortel Networks' $9.1-billion purchase of Bay Networks
in 1998.
As for the management incompatibility issue, Straus and Kalkhoven claim it
disappeared as soon as they got to know each other in the mountains. In fact,
almost scorning the notion, they intend to co-manage JDS Uniphase. Straus is
staying in Nepean, near Ottawa, as president and chief operating officer.
Kalkhoven, the chief executive, operates from the California head office. They'll
co-chair JDS Uniphase's board.
Kalkhoven calls the setup an ideal division of duties. "He [Straus] has the unique
ability to be able to communicate with customers, find out what they want, then
communicate with the scientists and work out how to build a product," he says
of his new partner. "My interest is in actually running the business. It's the other
side, the yin to Joe's yang. I get my kicks out of seeing the company develop a
structure."
After they discovered in the mountains that they're simpatico, a friendship grew
prior to the merger. "I felt more like a chaperone," says Zita Cobb, JDS Fitel's
former chief financial officer, who was given the task of managing integration of
the two companies. "Keeping them apart [until the final approval state] was more
difficult than trying to get them together."
"We really do like one another and we spend a huge amount of time trying to talk
to each other," says Kalkhoven. "A couple of weeks ago I was in Europe, and
Joe was there so we went to his university in Prague and relived his youth."
If the merger appears to be a corporate marriage made in heaven – or as close to
it as Yoho's mountains get – precedent suggests it was far from a sure thing. A
1999 survey of 179 technology company mergers, by Right Management
Consultants of Philadelphia, Pa., found that only about two-thirds were deemed
successful. According to Paul Wesman, director of corporate communications
with Right Management, co-management plans such as JDS Uniphase's are
often the culprit. "Even with the best intentions, one party becomes the dominant
player," says Wesman. "It is very difficult to run parallel managements."
Nor did Straus and Kalkhoven have to look far for examples of problem-prone
Canadian mergers: The $100-million (U.S.) purchase of UB Networks by
Ottawa-based Newbridge Networks in 1997 troubled Newbridge for nearly a year
and a half. And Nortel Networks Corp.'s purchase of Bay Networks in 1998 was
still a drag on Nortel a year later. Moreover, Bay Networks' head, David House,
one of the assets Nortel thought it had acquired, has bridled at working as Nortel
president under chief executive John Roth, and has announced he's leaving.
Technology analyst and JDS Fitel-watcher Emil Savov of Toronto brokerage
Goepel McDermid says JDS Uniphase is less likely to suffer the same
difficulties. "The executives don't have huge egos and no one is trying to be
number one," he says. Savov also likes the idea that Straus will run research and
manufacturing operations out of Ottawa while Kalkhoven oversees marketing and
sales from San Jose. The company expects to export two-thirds to three-quarters
of its production, mainly to the U.S. "The division of responsibilities has been
done according to each other's strengths," says Savov.
While it remains to be seen whether Straus and Kalkhoven can successfully
reconcile their personalities when they are running the business, the similarity of
their companies' backgrounds has always favoured a harmonious merger. Each
firm bootstrapped itself from proverbial garage-and-basement beginnings that
have characterized high-tech company startups almost to the point of cliché.
JDS Fitel was founded in 1981 by Straus, Gary Duck, Philip Garel-Jones and
William Sinclair, former colleagues at Bell Northern Research whose initials
became part of the company's name. Straus, who took over the management of
the company in 1993, favours an internal approach to growth, spotting new
markets, then developing and manufacturing technology products that meet the
demand. By the time JDS Fitel went public in 1996 at $12, it had sales of $75
million. By last June, its stock had undergone a 2-for-1 and a 3-for-1 split, yet
still had risen to $120 – overall, a 60-fold increase in price.
Uniphase began life in 1979 in a California garage manufacturing lasers used in
supermarket scanners. Kalkhoven, a marketer of software, worked with IBM in
the United Kingdom before moving to the United States to market software for a
number of companies. Attracted by Uniphase's potential in fibre-optics
telecommunications networks, he joined the company in 1992, took the
company public a year later and embarked on a program of growth through
acquisition, purchasing research and manufacturing facilities.
If nothing else, the two companies had good timing. In the early and mid-1990s,
the expansion of the Internet helped create a seemingly inexorable demand for
telecommunication bandwidth – capacity of the pipeline required to carry
information. Fibre-optic technology, which enables vast amounts of information to
move at the speed of light along thin strands of glass, emerged as the best
means of meeting the demand.
JDS and Uniphase developed products for handling light transmission in the
fibre-optic threads and sold it to telecommunications giants such as Nortel and
Lucent Technologies Inc., which have been developing fibre-optic trunk lines
called "backbones." Straus and Kalkhoven agree that they were likely on a
course that would have seen them try to poach each other's business at some
point. With the merger, they've not only avoided the expensive competition that
might have ensued, but also can provide one-stop shopping for the same
customers they used to serve separately.
Can anything stop the JDS Uniphase juggernaut? Certainly not timing. In fact,
the merged company may now be in an even better position than its
predecessors were. The current $5-billion (U.S.) fibre-optics industry is forecast
to grow to $21.3 billion within five years. "JDS Uniphase now dominates the
optical equipment industry," Savov says. "They are 50% bigger than the rest of
their competitors combined."
Nor should there be much disruption through integration of the two companies.
Straus and Kalkhoven don't believe much rationalization – or layoffs – is required
to gain economies of scale; rather, they intend to expand. The more
labour-intensive Canadian manufacturing operations, which accounted for 2,400
employees at the time of the merger, may actually grow to take advantage of
lower Canadian currency rates, Straus says.
Still, a miscue by JDS Uniphase in the first month of the new company's life was
a reminder that mergers are seldom seamless successes. In July, JDS
Uniphase's Canadian subsidiary had intended to offer common shares that would
be convertible into shares of the parent company. The intent was to increase the
number of common shares outstanding and broaden the shareholder base of the
parent company. But when the company failed to reconcile its U.S. records and
Canadian accounting prior to the offering, the Ontario Securities Commission
objected. Although the shares were eventually offered, failure to get OSC
approval meant they were sold only to sophisticated investors with a minimum of
$150,000 to put down.
Embarrassing, to be sure. But hardly a showstopper. And, in any case, that kind
of administrative problem will disappear as the Canadian and American divisions
are more closely knit together, says industry analyst William Magill of Banc of
America Securities. "The two [companies] are very strong players in the optical
component industry and I don't see any pitfalls," says Magill.
Neither, apparently, do customers or investors. At the end of July, a little more
than a year after the principals first began courting, JDS Uniphase reported
profits of $125 million on sales of $588 million (U.S.). Just as JDS Fitel's and
Uniphase Corp.'s results frequently exceeded analysts' forecasts, so too did
those of the new, merged company. Translated into Canadian dollars, JDS
Uniphase's sales figures have already vaulted it close to the $1-billion mark that
Straus envisioned – proving, perhaps, that when it comes to merger success,
there's no substitute for the pedigree of the participants.
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