no worries ...see last paragraphs...JDS Shares Fall 13% on Investors' Fears
Regulators May Block SDL Acquisition
By SCOTT THURM
Staff Reporter of THE WALL STREET JOURNAL
JDS Uniphase Corp.'s proposal to buy its biggest rival in the booming fiber-optic component market prompted investor skepticism that the deal would win antitrust approval, and that JDS could digest SDL Inc. after a string of big acquisitions.
Shares of JDS fell 13% knocking some $5 billion from the value of the all-stock deal, which had been about $41 billion, a record for a high-technology acquisition.
SDL would be JDS's third major acquisition in a year, at escalating prices. To win approval of its last acquisition, of E-Tek Dynamics Inc., JDS had to agree to limit its purchases of some types of optical filters. After a prolonged review, the Justice Department filed a lawsuit to block the deal, at the same time it filed papers settling the suit with JDS's concessions. Analysts say JDS, San Jose, Calif., likely will have even a tougher time winning approval for the SDL deal.
"The industry in general is getting concerned about consolidation" of independent fiber-optic component makers, said Jim Kedersha, an analyst for SG Cowen, Boston. "This will probably force the JDS people to get more creative with the Department of Justice."
As an indication of the investor concern about the future of the deal, SDL shares traded at a significant discount to their potential value if the deal is completed. SDL shares rose 8.6%, or $25.375, to $320.6875 in 4 p.m. trading on the Nasdaq Stock Market Monday. But that is far short of the $384.275 those shares would be worth under the terms of the deal.
JDS shares fell $15.0625 to $101.125, also in Nasdaq trading.
JDS Uniphase Agrees to Purchase Rival SDL for $41 Billion in Stock (July 10)
Sycamore Networks Contract Ignites Fiber-Optic Frenzy (July 10)
SDL to Acquire Photonic Integration in $1.8 Billion Cash and Stock Deal (May 11)
JDS Uniphase to Buy E-Tek Dynamics in a Stock Deal Valued at $15 Billion (Jan. 18)
The biggest concern for regulators, analysts' said, will be the combined companies' roughly 80% market share for some types of lasers. In modern communications networks, lasers create beams of light that carry information over hair-thin glass fibers. Roger Wery, of industry consultant PRTM, Mountain View, Calif., speculated that JDS may have to agree to divest some of its laser capacity to win approval of the deal.
But that may be acceptable to JDS executives, because analysts believe JDS covets three other pieces of SDL's technology even more than it wants the lasers. Those are packaging modules for the lasers, a new type of amplifier that helps maintain the laser over long distances, and tiny devices that break a single beam of light into multiple "colors," each of which can carry a separate stream of information.
For their part, JDS officials said they ultimately expect to win approval from both regulators and shareholders for the deal. "We believe that the transaction creates a number of benefits for our customers," including more manufacturing capacity and better-integrated products, said Mike Phillips, JDS's senior vice president and general counsel.
While JDS and SDL both make lasers, Mr. Phillips said their products are slightly different and are bought by different customers. Moreover, he said JDS faces stiff competition from established rivals and a new generation of start-ups.
The fate of the deal may rest with JDS's customers, companies such as Nortel Networks Corp., Lucent Technologies Inc. and Ciena Corp., which make switching gear for fiber-optic networks. Analysts said these customers didn't raise many concerns about the E-Tek acquisition, which made it easier for regulators to approve the deal.
JDS's relationships with Nortel and Lucent are complicated. The two telecom-equipment makers are JDS's biggest customers, but they also are competitors, who make fiber-optic components for their own machines. Spokespeople for Lucent and Nortel didn't return calls. Mr. Kedersha, the SG Cowen analyst, said he spoke to a Ciena executive who didn't raise many concerns about the SDL deal.
Jay Liebowitz an analyst for market researcher RHK Inc., South San Francisco, Calif., said JDS's customers will see both positives and negatives in the deal: "On the one hand, a supplier gets gobbled up. On the other hand, the supplier you end up with has more capability than the others separately, so the market can grow faster," Mr. Liebowitz said.
That is a big deal in a market growing as rapidly as fiber-optics. RHK estimates the market for fiber-optic components will grow to $23 billion in 2003, from just under $10 billion this year. Demand is intense, as telecom companies rewire the globe to accommodate the explosive growth of the Internet, and parts shortages are routine.
Despite that rapid growth, analysts said SDL ultimately faced the prospect of being squeezed out, because it specialized in a few products and couldn't compete with JDS's much broader product line.
Mr. Kedersha also questioned whether JDS could digest SDL as easily as its past acquisitions. JDS executives told analysts in a conference call Monday that they expect per-share earnings to grow once the deal is completed. But Mr. Kedersha said some back-of-the-envelope math suggests earnings per share would fall by a few pennies, unless sales at the combined company significantly exceed current projects for JDS and SDL separately. Mr. Phillips said JDS expects combined revenues to rise significantly.
One big JDS shareholder said he isn't concerned by either antitrust problems or potential integration difficulties. "Management depth at this company is very extensive," said Bruce Bartlett, who manages several technology funds for Oppenheimer Funds. Mr. Bartlett has roughly $2.5 billion of his $13 billion portfolio invested in fiber-optics companies, including JDS and SDL. On antitrust concerns, he said the SDL acquisition would ultimately be "less problematic than E-Tek."
-- Steven Lipin contributed to this article.
Write to Scott Thurm at scott.thurm@wsj.com |
