Merge, Merge, and More Merges!
The long waited consolidation of the telecommunication equipment industry is finally coming.
Merge to fill product gaps. Merge to gain market share. Merge to reduce overlap. Merge to save money.
Merge soon, merge now, and merge before it's too late!
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Ignis Optics Acquisition by Bookham Technology
25th September 2003
Part 1: Q and A with Ignis Optics President and CEO Michael Lebby and VP of Marketing Steffen Koehler.
Why did Bookham buy you?
Synergy! There were two main reasons: firstly, Bookham saw this as a way of getting into the pluggable optics space. Secondly, it also saw us as an entry into datacomm - another untapped market for the company. Bookham has been historically focused on telecom, though it knows there is a large market on the datacomm side.
How much did Bookham pay?
$15.5 million, all stock, based on a four-week average.
Given that the total investment in Ignis Optics so far is $30 million, this was a huge hit for somebody? However, considering how well Ignis has stood its ground in the downturn, this is surprising?
Two answers to that: first of all the investment was two and a half years ago, so things have been revalued. But more importantly, though the investors are getting less out right now than they put in, if you take a look at the deal and the price targets that have been given on Bookham, if that target is achieved, the investors will get out at about even. I believe SoundView just put out that target price for Bookham stock.
In any case, from our perspective, the primary driver for this deal was not short-term cash focused. The main driver was I believe a strategic move by Bookham, both to get into the datacomm space and also to strengthen its position in pluggable optics.
But if there is such a market for pluggable optics within the next two years, why could Ignis not just continue to go it alone? It seems to have successfully gone through the worst downturn in the history of this industry.
While we are pretty proud of what we have done, there are a lot of things that Bookham offers us that we don't have. The largest thing that Ignis gains is simply a channel to market. Bookham has enormously broad channels compared to those we have, excellent customer relationships and a broad product portfolio, so when Bookham goes to a customer, it can sell not just our product but the rest of its portfolio at the same time, which is certainly an advantage.
Bookham does not appear to have a broad customer base, however. Was that a concern for Ignis? It seems quite reliant on Marconi and Nortel - two customers who are not without problems of their own.
It is true that Bookham gains a high proportion of its revenues from a limited customer base, but it does have extremely entrenched positions within those customers. But even outside of those customers, it has a large spread compared to Ignis.
Bookham has a large sales force, excellent coverage in Europe, even outside the core customers, strong coverage in other areas - actually a truly global sales force. What we have is a collection of very good reps and a good but very small sales force. We cannot match the sales coverage that Bookham has brought to us.
We also need to show the customers that we are going to be around for a long time, and this deal we believe illustrates that.
The last point is interesting, as this was a concern for Bookham also. At the time of the New Focus acquisition, which was the subject of a separate interview with us, Dr. Turley mentioned that one of the reasons for that deal was for Bookham to gain extra cash. One would have thought that there were other "more cash stable" partners for Ignis?
We cannot comment on Bookham's motivations for other deals, nor can we comment on Bookham's cash position, as we are not yet 'Bookham' until the deal is closed. In terms of who initiated this deal, it would be fair to say that in the past Ignis has garnered the attention of a lot of people as we are one of the few startups that has really good positions with a Tier 1 customer base.
This deal is particularly good for Bookham because it doesn't just plug a hole in its product portfolio, it provides the company with an instant leadership position in XFP, it gives a strong digital diagnostics capability, and it offers low-cost datacomm style design with telecom-style performance. It also provides Bookham with a very strong base in Silicon Valley.
What is your revenue split between telecom and datacomm?
We are not prepared to break that down at this point. However, what we are trying to get across is that we make products that serve both Gigabit Ethernet and Fibre Channel and SONET/SDH - all via the same product. A good XFP product does that.
People are now realising that the tiny module is the right vehicle. At Supercomm we showed that the module can reach 120 km. So anybody who is doing 10 Gbit/s solutions is certainly working on XFP. However Ignis is the only company so far that has announced a volume purchase order that we are shipping against. Nobody else measures in the 100,000s for purchase orders.
Does Ignis sell in Europe at the moment?
Yes we do.
Was it a possibility that Bookham would do what it did with Cierra Photonics - strike up a cooperative agreement first, then move to acquisition at a later stage when both parties were certain about the relationship?
A lot of companies do that - Pine Photonics and OpNext being another example - that model was discussed, as were a number of other business models. But what made the most sense for Bookham was controlling and combining the engineering efforts at Ignis with its own. This pluggable technology is mostly going into the enterprise/client space currently, but as we look forward the growth is expected in the metro/trunk line side. Bookham has a lot of experience there, whereas ours to date has been in the enterprise/client space.
How autonomous do you think you will be under Bookham, in terms of facilities, staffing, etc.?
We doubt if that has been decided, but Bookham cannot just chop up the business if it wishes to continue to serve the customers that Ignis currently serves, which we are sure it will do. And Bookham certainly plans to continue the developments that Ignis is currently working on.
Part 2: Q and A with Dr. Steve Turley, Chief Commercial Officer, Bookham Technology.
Why Ignis?
Because from our customers' perspective, they are saying they wish to move to pluggable optics in the future - XFP for 10 Gbit/s, SFP for 2.5 Gbit/s, have extensive experience in the design and manufacture of low-cost coponents and they want to understand how far XFP can actually go - whether it is viable for intermediate or longer links.
What we see is the combination of Ignis Optics' present capability in this field, matched by the electro-optic depth of experience that we have, as an ideal combination to see how far we can extend that platform. The market is in any case moving in that direction.
In our view Ignis is the best in this field - it is the leader in XFP, it has a great position in SFP in terms of its capability. All that has held Ignis back is the fact that it is a relatively small company, and major customers are adverse to relying on small companies for crucial technology. But together with its pluggable technology, our experience in optics and our routes to market, we should be a very powerful force in this area.
The $15.5 million in stock that you are paying can be seen in two ways: on the one hand the $30 million investment that Ignis had obtained essentially means that you have bought the company for half of what it would have cost to setup or buy such a unit two and a half years ago. On the other hand, the valuations of most companies in this sector have dived by as much as 90% - perhaps more - over that time, which could be taken to mean you have overpaid?
I don't see that we have overpaid, because we have to look at the valuation in terms of the relevance of the company's products and technologies to where the market is going. Ignis are spot on, we feel, to where the market is heading, not where the market is today. This will certainly accelerate our route into pluggable optics.
Also we have clearly been playing in the telecom side of the market. This deal signals Bookham's entry into the enterprise/storage end of the market. This alone is a massive expansion of our addressable market.
You have done two deals this week - the first with New Focus, which was hugely beneficial in terms of cash, and now this one, which you are paying for in stock. If the order of the two deals had been switched, and given the market and your customers' perception of your cashburn rate, do you think the market would have slaughtered you? Was the order in which these deals were announced contrived in any way to appease the market perception of Bookham's cash position or was it just coincidental?
We do not know how the market would have reacted. Acquiring Ignis, we obviously believe, was the correct thing to do, even without the New Focus deal. There was no policy decision at Bookham to announce the New Focus deal first. We negotiated both of them together, and the New Focus deal was the first one to come through. It could have been that it happened the other way around.
Ignis obviously has competitors and they themselves have been working on pluggable solutions for several years. Optical Keyhole, in fact, first interviewed Ignis back in June 2001, 6 months after it was launched. Presumably the move in the market towards this solution was not lost on Bookham, so what incomplete work are you now going to have to throw away?
I don't think we have to throw away any work! We were already investing in pluggable technology at 2.5 Gbit/s that we were taking to market, and are investing in work on XFP at 10 Gbit/s. In fact on our stand at ECOC, we have an operating Bookham XFP product, showing the results of the work we have done internally.
What we see is an acceleration of our route into this market, rather than giving us a route. We have more 'horsepower' to move rapidly.
Were the major customers on whom Bookham currently relies in the telecom space, particularly Nortel Networks and Marconi, actually and specifically demanding this type of solution or was this a more 'general' concept from Bookham?
We are extremely driven by customer feedback, yes, so in answer to your question, our customers were giving us very clear signals that they were moving to pluggable optics. That is why we made investments in the past, and we saw Ignis as an opportunity to strengthen considerably our presence there and accelerate our time to market.
Would you describe pluggable optics as 'vital'? Is there a place for an optical component company in the future that does not have this technology?
Well, we or anybody else could survive without it, but over the next few years it will certainly be a core technology. There will be a significant migration to pluggable technology.
Can you provide an 'idiot's guide' as to what this pluggable technology offers end customers?
Cost is a key element - the ability for very simple deployment. Essentially you can upgrade a network by simply plugging in extra components. This provides a big cost saving to the operator, it is much simpler to deploy, and also much simpler to maintain. These products also offer much higher density, so there are savings in spare parts.
How do you intend to run the Ignis operation?
We intend to keep the base in San Jose, though we are not sure exactly where yet. We certainly intend to keep the skills there and we are not intending to relocate the operation to the UK. We look at this as another investment we have made in the U.S.
Are you aware of Ignis Optics' current revenues?
We cannot publicly quote that at the moment, though the company is certainly on a steep revenue ramp. We did due diligence with the customers of Ignis, and they were very very positive about the prospects going forward. The only reservation the customers had was related to the size and financial survivability of Ignis. On a product level, though, there were no complaints - the customers just needed reassurance that the company was going to be around.
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