Here are two articles from thestreet.com
Bandwidth and Bundling Have SDL, E-Tek Watchers
Talking Deal
By Kevin Petrie
Staff Reporter
12/8/99 12:28 PM ET
thestreet.com
Some day, the investing masses will start to think again, and to separate winners
from losers in the richly priced optical-network sector.
For SDL (SDLI:Nasdaq) and E-Tek (ETEK:Nasdaq),
staying in the winner's circle may mean merging,
several investors and industry observers say. A
combined company could offer a nice array of
components for fiber-optic networks, tilting the competitive scales in an industry
that's caught investors' fancy. The companies need to demonstrate that they can
stand on equal footing with JDS Uniphase (JDSU:Nasdaq) as arms dealer to the
bandwidth revolution.
While neither company will comment on possible merger plans, both place a
priority on broadening their portfolios.
Hot Sector
JDS Uniphase, the acquisitive leader born when JDS Fitel and Uniphase paired
in July, has been one of the stock market's hottest stories. Shares have doubled
in the last two months and climbed sevenfold this year. SDL and E-Tek,
meanwhile, have been no slouches either, despite their subordinate position in
the industry: They've seen their shares jump 10-fold and fourfold, respectively,
this year.
Competitors in the sector are entering ambitious deals. In early 2000 Corning
(GLW:NYSE) will pair with Oak Industries (OAK:NYSE) in order to bundle many
light-controlling instruments into modules that customers such as Lucent
(LU:NYSE) and Nortel (NT:NYSE) deploy in their network systems. On
Wednesday Corning agreed to acquire Siemens' optical-fiber businesses for
around $1.4 billion.
That's because vendors are looking for one-stop shopping. "For certain types of
products, vendors these days are tending to ask for modules as opposed to
components for the sake of easier, more cost-effective manufacturing," says
Kathy Szelag, vice president with Lucent's optical-network group. Lucent is a
customer of JDS Uniphase, SDL and E-Tek.
"If you're a customer looking for solutions, you'd be pretty hard-pressed not to go
with Uniphase," adds Chuck McCurdy, executive vice president of Veredus
Asset Management, owner of JDS Uniphase and E-Tek. So a merger of SDL
and E-Tek wouldn't surprise him.
There is almost no overlap between SDL's "active" components, which emit and
manipulate light signals, and E-Tek's "passive" conduits for guiding light. Their
headquarters are located about five miles apart in San Jose. Both companies
started in the 1980s and have relied on government contracts.
Different Paths
But SDL and E-Tek have taken different paths into the commercial fiber-optic
market. SDL Chief Executive Don Scifres, a physicist by training, has steered his
cerebral team since its inception in 1983. E-Tek, by contrast, fits the more
conventional clothes of a Wall Street darling. In 1997 it fetched a $108 million
investment from Summit Partners and hired as CEO Mike Fitzpatrick, a former
head of Pacific Telesis, who has less of a technical background.
"I just think they'd be stronger together," because they could pare costs and
produce more reliable technology, says Phil Lamoreaux with Lamoreaux
Partners in Sausalito, Calif. He had exited E-Tek early this year after JDS Fitel
and Uniphase announced their merger plans. Lamoreaux would consider buying
shares again if SDL and E-Tek combined, provided SDL also divested itself of its
nonfiber-optic businesses.
Meanwhile, Lamoreaux is sticking with what he calls the sector's "bull's eye" --
JDS Uniphase. His hedge fund owns shares at an average cost of $1, thanks to a
prescient investment in Uniphase's IPO in 1993.
Room to Grow
"We will do both small and large acquisitions," says Scifres of SDL. His
company already draws half its revenue from modules that combine components.
It bought some optical assets from Polaroid (PRD:NYSE) for $5 million early
this year, then snapped up IOC in the U.K. in May for $63 million stock. SDL
also has 10 customers trying a new amplifier.
E-Tek, which went public in March, acquired ElectroPhotonics in Toronto for $40
million cash and stock in June. Two months later it snapped up Sunnyvale,
Calif.-based Kaifa Technology, also for $40 million stock and cash. E-Tek did
not make executives available for comment.
Still, they trail JDS Uniphase, which sells "components and modules across
almost the entire spectrum of the optical market," including long-distance,
metropolitan, cable-television and undersea networks, says Charles Willhoit,
equity analyst with J.P. Morgan, not an underwriter for any of the companies he
discussed. Willhoit rates all three stocks buy, but says JDS Uniphase is the
"core holding" for clients.
The Long Haul
Long-term strategic questions are all the more pressing because all three
companies have been amply rewarded for their success so far. SDL and E-Tek's
stocks jumped even as both companies fed additional shares to investors in
recent months. SDL's revenue increased 76% to $47.5 million from $27 million
one year earlier, and E-Tek increased revenue 83% to $60.3 million in the
September quarter from $32.9 million one year earlier. SDL trades at 45 times
revenue in the trailing four quarters, and E-Tek trades at 33 times revenue.
But JDS Uniphase is valued at 63 times revenue. It achieved revenue of $230
million, up 104% from $113 million on a pro forma basis.
"The biggest immediate challenge is meeting orders," says Scifres of SDL. "But
we certainly want to broaden our product line."
Even merging wouldn't fill all their gaps, says JDS Uniphase CEO Kevin
Kalkhoven. The combined companies still would lack a full suite of "source
lasers" -- that is, light emitters that serve as differently powered flashlights in the
network pipe.
But at the very least, a combination of SDL's "active" and E-Tek's "passive"
components would make for an interesting shakeup in a red hot sector.
Tech Stocks : Networking
JDS Uniphase, King of the Optical-Fiber Hill
By Kevin Petrie
Staff Reporter
12/8/99 12:27 PM ET
Give this market a story like JDS Uniphase (JDSU:Nasdaq), and it gets all
carried away.
Here's the story: Telephone carriers and ISPs are straining to ease traffic
bottlenecks by fattening their fiber-optic networks. Companies such as JDS
Uniphase, SDL (SDLI:Nasdaq) and E-Tek (ETEK:Nasdaq) furnish the bundles of
amplifiers, filters and other components that solve those problems.
And here's where the market gets carried away: JDS
Uniphase's stock has climbed nearly eightfold this
year, and like that of many peers has roughly doubled
in the last two months. It finished Tuesday up 5 1/2 at
259 3/4, giving the stock a market value of $45.1
billion. Investors, who for months have been swooning
over the stocks of companies that supply the nuts and bolts to expand
telecommunications networks, are basting other Net infrastructure plays in their
enthusiasm as well: JDS Uniphase customer Ciena (CIEN:Nasdaq) Tuesday
gained 11 1/2, or 24%, to 60 1/16 after the London-based carrier iaxis expanded
its plans to deploy Ciena's new optical systems.
And because JDS Uniphase sells the biggest bundle of components, it boasts
the highest profile among investors -- and the most richly valued stock in the
bunch. JDS Uniphase has traded at 63 times its revenue in the last four quarters,
compared with SDL's price-to-revenue ratio of 45 and E-Tek's ratio of 33.
One East Coast money manager, who first invested in JDS three years ago, has
lightened his position lately because he worries that JDS Uniphase has run its
course. He says "it's ceased to be a fundamental story."
But that clearly remains the minority view. "Everyone is happy to voice valuation
concerns," says Arun Veerappan, equity analyst with Robertson Stephens who
started JDS Uniphase at buy about two months ago when it traded at 150. "But
they start to get cold feet when it comes to selling." Robertson Stephens hasn't
done any underwriting for the company.
"People have recognized that the next 20 years will be the years of bandwidth,
rather than semiconductors," explains CEO Kevin Kalkhoven.
Analyst Charlie Willhoit with J.P. Morgan says JDS Uniphase's broad module
offerings will be best poised to serve customers such as Nortel (NT:NYSE),
Lucent (LU:NYSE) and other large builders of network equipment, as they enlist
outside specialists for optical components. Willhoit rates JDS Uniphase shares
buy; his firm has no banking ties with the company.
Look for JDS Uniphase to increase revenue 71% and operating profits 65% next
year from 1999, says analyst James Jungjohann with underwriter CIBC World
Markets. Researcher RHK expects the optical network component business,
excluding undersea and cable television systems, will grow 50% annually to
more than $6.7 billion in 2003 from $1.4 billion this year.
The story was a long time in the making. Its predecessor Uniphase, unlike many
of Silicon Valley's new ventures, actually did start in a garage -- 20 years ago.
For more than a decade it fashioned lasers for such uses as DNA sequencing
and testers for silicon chips. In 1995 Uniphase CEO Kalkhoven, an avid skier who
has described himself as a "failed geologist," started acquiring fiber-optic
specialists such as United Technologies Photonics and Philips
Optoelectronics in Eindhoven, the Netherlands.
In July Kalkhoven cut his boldest deal yet, marrying Uniphase with JDS Fitel of
Nepean, Ontario. The aim is to couple Uniphase's array of "active" components,
which emit and manipulate light signals, with JDS Fitel's "passive" conduits for
guiding light.
"They sell the bullets for the bandwidth war. Why is everybody suddenly realizing
it? I don't know," says the East Coast manager. "It's kind of upsetting," he adds.
"Now I have to look elsewhere" to invest new money. |
