Segments from Chase H&Q's merger report, released in-house this afternoon:
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Strategic rationale and analysis of pros and cons:
To date, JDS has employed a multi-faceted growth strategy: 1) expand its component portfolio and technology base, 2) integrate these components into modules, and 3) expand manufacturing capacity. . . .
The benefits of this acquisition include
JDS gains superior pump module technology, bolstering its EDFA business. JDS currently is a leading supplier of Erbium Doped Fiber Amplifiers (EDFAs). EDFAs are a key DWDM subsystem that amplify light in the optical domain. 980nm pump modules are critical components in EDFAs. The most important metrics for these pump modules are power and reliability. JDS Uniphase currently is a leader in pump chips (through its IBM Zurich acquisition) and is ramping its pump module capabilities in Plymouth, England. Still, JDS currently relies on SDL for a majority of its pump module supply and is a 10+% customer of SDL, due to the superior performance of SDL’s pump laser products. Futhermore, SDL recently began volume shipments of its next generation grating-stabilized 300mW+ pump module – by far the highest performing product on the market. We believe JDS’ chip business is better suited to non grating stabilized applications, such as short-haul uses, and SDL’s chip business is better suited for very high-powered grating-stabilized applications, such as long-haul DWDM. As far as market share goes, we believe SDL had roughly 40% of the $185M 1999 980nm pump module market, and Nortel and Corning (Lasertron) modules, which mostly use JDS chips, accounted for about 50%. Competitors in the chip market include Lucent (Ortel), Corning (Lasertron), Pirelli, Furakawa and Multiplex. Nortel, Corning, Pirelli, Furakawa, and Multiplex manufacture modules. However, few if any of these competitors can even approach the performance of SDL’s products. Over all, by acquiring SDL, JDS gains the industry’s best 980 nm chip and module technology, which should prove to be a substantial competitive advantage in its high-margin EDFA business.
JDS gains SDL’s crucial next-generation Raman technology and associated patent portfolio. Raman amplification is a distributed optical amplification technology that is crucial for next-generation applications and extends the performance envelope of optical networking in terms of speed, reach, and channel density. For example, virtually every ultra long-haul and 40 Gbps design relies on this technology because of its low noise and high, distributed power. Additionally, Raman amplification can be applied in the L-Band (between 1565 and 1605nm), and also from 1300 to 1650nm. Accordingly, this technology can help system designers increase channel counts. Although JDS Uniphase and Lucent have recently introduced Raman products, we view SDL as the leader in this segment of the market with significant time-to-market and power advantages. Additionally, SDL owns the fundamental patents to the technology, which it obtained through its Polaroid acquisition (although Lucent has the rights to many of these patents). SDL recently announced capacity expansion for Raman, attesting to the strong demand for this product as next-generation ultra-long haul, high-speed and density systems gain traction in the market.
SDL adds integrated optics capabilities, which are becoming increasingly important as volumes grow. Through its PIRI acquisition, SDL gained key arrayed waveguide (AWG) multiplexing/demultiplexing technology. This technology is becoming increasingly important with an emphasis on higher channel counts and lower costs. DWDM systems essentially multiplex (combine) and demultiplex (separate) a number of optical signals, each at a different wavelength, on a single fiber optic cable. These systems can use various multiplexing technologies, such as thin film filters (TFFs), arrayed waveguides (AWGs), or fiber Bragg gratings (FBGs). While TFFs and FBGs are manufactured in batches, according to wavelength, AWGs are manufactured on wafers, usually constructed of silica. One of the most important metrics for optical systems is insertion loss. The losses associated with TFFs and FBGs per channel (one filter per channel) are low, but these technologies are often cascaded. Consequently, as system channel counts grow, so do losses. Alternatively, the loss in an AWG is essentially independent of channel count. This loss can be thought of as a “fixed cost” associated with coupling the fibers to the AWG. So as systems continue to become denser, AWGs make more sense, both from optical loss and manufacturing perspectives. Waveguide technology can also be applied to other optical components, such as variable optical attenuators (VOAs), switches, and splitters. Additionally, individual components can be combined on a single wafer to construct integrated subsystems, such as add/drop multiplexers. Overall, while JDS is already a leader in TFF-based multiplexers (with the majority of its TFFs coming from OCLI) and the Company also has FBG technology, PIRI adds AWG capabilities, essentially completing the mux/demux picture.
SDL’s Veritech, and Queensgate properties add technology. For transmitter and receiver electronics, Veritech is a leader in optoelectronic modules for submarine and terrestrial transmission applications. Through the Epitaxx acquisition, JDS has significant optoelectrical receiver and photodetector products and technology. Furthermore, JDS is a leader in source lasers and modulators. When combined with Veritech (already a supplier to JDS Uniphase), JDS has virtually all of the technology needed for transmitters and receivers. Additionally, with Queensgate, JDS gains channel monitoring, which uses tunable filter technology to measure the optical properties of a signal (e.g., signal-to-noise, rejection, frequency, and power), and feeds this information back to the system.
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There's more and if anyone wants the report, email me and I'll forward it.
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