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JDS snares fibre-optic firm
Says $2.8-billion stock deal for Optical Coating
will tighten grip on market for high-speed data parts
LAWRENCE SURTEES
Telecommunications Reporter; With file from Bloomberg News.
Friday, November 5, 1999
JDS Uniphase Corp. is buying Optical Coating Laboratory Inc. for $2.8-billion (U.S.) in stock and
says the acquisition of the U.S. company will strengthen its grip on the fast-growing market for
fibre-optic laser parts.
The latest in a string of four acquisitions by JDS Uniphase in the past two months, the deal is by far the
biggest since the completion of a $4.7-billion (Canadian) merger of equals between Uniphase Corp. of
San Jose, Calif., and JDS Fitel Inc. of Nepean, Ont.
JDS proposes to exchange 0.928 common shares for each share of Optical Coating, and expects the
deal to close in the first quarter of 2000. The deal must clear U.S. antitrust laws and be approved by
shareholders of Santa Rosa, Calif.-based Optical Coating.
"This merger will enable us to shorten our product development cycles and bring products more quickly
to market," said Kevin Kalkhoven, JDS co-chairman and chief executive officer.
Both companies are riding a global boom in demand for high-speed, or broadband, fibre-optic
communications networks. And both make parts for a new system of fibre optics -- called dense wave
division multiplexing -- that crams dozens of light beams on a single fibre, boosting network capacity.
JDS makes components for the tiny semiconductor lasers that are the pulsing heart of fibre-optic
systems. Optical Coating, which has been in business for 51 years, makes special films and tiny filters
used by JDS that separate each laser beam on a pulsing fibre-optic line.
"An optical filter gives each laser its own lane on a fibre-optic freeway," Charles Abbe, chief executive
officer of Optical Coating, said in an interview.
Financial analysts applauded the deal.
"It strengthens JDS's competitive hand," said Kevin Slocum, a high-tech analyst at SoundView Financial
Group of Stamford, Conn.
There was some profit-taking among JDS investors yesterday, pushing the company's share price down
$1.30 on the Toronto Stock Exchange, where the stock closed at $280.70. But JDS's share price has
almost quintupled this year since it announced the Uniphase deal -- and has soared 60 per cent since
Oct. 19.
Optical Coating's share price skyrocketed $49 (U.S.) -- or 41 per cent -- yesterday on the Nasdaq
Stock Market to close at $168.25. The company's stock had increased almost sevenfold in the past
year before yesterday's gain.
A shareholders' meeting will be still be held today to authorize a doubling of Optical Coating's shares
outstanding, to 28.3 million from 14.2 million. But the company's board will not proceed with the
previously planned two-for-one share split because of the deal with JDS, Mr. Abbe said.
Officials at both companies attribute the recent gains in share prices to the rapid growth in the optical
networks business.
JDS and Optical Coating began talks toward a deal about a month ago, leading to a deal being struck
very early yesterday morning, Mr. Abbe said.
But the idea for a deal arose from a manufacturing joint venture that JDS Fitel struck with Optical
Coating in February, 1997, Jozef Straus, JDS co-chairman, president and chief operating officer, said in
an interview.
"I first started buying filters from them almost 20 years ago when I was doing research in early
fibre-optic systems," said Mr. Straus, who then worked at Nortel Networks Corp.'s research labs in
Ottawa. He co-founded JDS Fitel in 1981.
JDS is now widely regarding as a leading provider of DWDM laser components and is a major supplier
to most fibre-optic network makers -- including Nortel and rival Lucent Technologies Inc. The market
for optical network gear was worth $11-billion last year and is expected to be worth more than
$35-billion by 2001, investment dealer S.G. Cowen forecasts.
But equipment makers have been struggling to keep up with exploding customer demand for more --
and faster -- networks spawned by the growth of the Internet. Earlier this week, Nortel announced a
$400-million investment to triple the capacity of its optical network business by next year.
And that has had a ripple effect on both JDS and Optical Coating, who must also boost their production
to keep up -- providing further impetus for a deal.
"We felt the best thing to do was consummate the marriage we've been flirting with," Mr. Kalkhoven
said.
The planned acquisition also would ensure that JDS has exclusive access to Optical Coating's next
generation of laser filters.
"Those filters and coatings are the key to further advances in DWDM systems," Mr. Straus said.
That is because the addition of more lasers on a fibre-optic strand requires the same number of
improved filters to discriminate between each laser beam. Both Nortel and Lucent have announced
plans to double the number of lasers in their DWDM systems by next year, to a staggering 320 on one
fibre-optic line from the current 160.
"We think this merger is a marriage made in heaven," said Mr. Abbe, referring to the link between JDS'
manufacturing and Optical Coating's R&D.
MARRIAGE PARTNERS
OPTICAL COATING LABORATORY
President, CEO: Charles Abbe
Nasdaq symbol: OCLI
Head office: Santa Rosa, Calif.
Operations: Manufactures optical thin film coated components used to manage light. The company's
products are used in computer monitors, flat panel displays, telecommunications systems, photocopiers,
fax machines, medical, analytical equipment and instruments, projection imaging systems, satellite power
systems and aerospace and defence systems.
JDS UNIPHASE
Chairman, CEO: Kevin Kalkhoven
Nasdaq symbol: JDSU
TSE symbol: JDU
Head office: San Jose, Calif.
Operations: Provides advanced fibre-optic components and modules. Products are sold to
telecommunications and cable television system providers worldwide. They include semiconductor
lasers, high-speed external modulators, transmitters, amplifiers, couplers, multiplexers and optical
switches. JDS also designs, manufactures and markets laser subsystems.
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