LOCAL BUSINESS
Friday 29 January 1999
JDS Fitel, U.S. multinational in
$6.1-billion merger
Karyn Standen
The Ottawa Citizen
Nepean's JDS Fitel, Inc., the high-flying darling of the stock market, is
merging in a stock swap with a multi-national U.S. company to create a
telecommunications equipment giant worth more than $6 billion.
JDS Fitel and San Jose, California-based Uniphase Corp. announced
yesterday they will join in a "merger of equals" that values the two
companies at $6.1 billion U.S., as of yesterday's market close.
Analysts applauded the deal. They say it provides a giant, one-stop
source of telephone equipment parts at a time when telephone
equipment vendors, racing to build fibre-optic systems for phone
companies and Internet service providers, are demanding faster delivery
of fewer product pieces in order to cut costs and save time.
Uniphase is the leading third-party supplier of so-called active
fibre-optic components, which are the lasers and computer chips that
help fibre-optic networks transmit greater loads of data. JDS Fitel is the
leading third-party supplier of passive components, such as filters, which
manipulate the light carrying the data. Bringing the two suppliers together
creates a "good fit" in a key networking technology, said Michael
Urlocker, a technology analyst with Credit Suisse First Boston.
Investors also responded positively to the merger. JDS Fitel's stock
jumped on the Toronto Stock Exchange to $60 yesterday, a gain of
$1.50, on rumours of a deal before trading was halted in the late
afternoon prior to the announcement. On the Nasdaq, Uniphase's shares
were halted at $80.75, up $3.63.
"This represents a fairly formidable financial entity," said Uniphase chief
executive Kevin Kalkhoven in a conference call. "More importantly, (the
merger creates) a very significant capability for our customers, who are
the telecommunications equipment vendors, to be able to integrate the
components that are necessary for them to build systems in a more
meaningful and faster time to market."
The new company, to be named JDS Uniphase, will be one of the
world's largest and most advanced makers of fibre-optic equipment,
used to speed data around networks.
JDS Uniphase will have 3,600 employees operating in eight sites around
the world, and customers that include many of the world's largest
telecommunications and cable companies.
JDS Fitel chief financial officer Zita Cobb said no layoffs will occur
among JDS Fitel's 2400 employees. Plans to move into JDS Fitel's new
headquarters in the South Merivale Business Park will proceed as
planned, she added.
The new company will have more than $630 million in sales, revenue
growth of 56 per cent and profit growth of 74 cent in the next three to
four years.
"We've given birth to a bouncing new baby that is actually a pretty big
baby, and growing very, very quickly," said Ms. Cobb. "Over the last
year, sales and operating profits of both companies have grown 60 per
cent and 64 per cent respectively. This new baby also happens to have
about $200 million in cash and no debt."
In the deal, JDS Fitel shareholders in Canada will be offered nearly .51
of a share of JDS Uniphase Canada, a wholly owned subsidiary of JDS
Uniphase. Or, shareholders could instead choose the same amount of
JDS Uniphase stock, for each JDS Fitel share they own.
Current JDS Fitel and Uniphase shareholders will each own about 50
per cent of the new company, and the transactions structure is expected
to provide the opportunity for a tax-free exchange for JDS Fitel's
Canadian shareholders.
Furukawa, JDS Fitel's largest shareholder, with about 52 per cent of
outstanding shares, will sell about 3.5 million of its more than 40 million
shares in the near term.
JDS Uniphase will trade on the Nasdaq, while its Canadian subsidiary
will continue to trade on the TSE.
The deal will be accounted for as a purchase, and the resulting goodwill
will be amortized over a period of about five years. Mr. Kalkhoven says
the transaction "will be mildly accretive to earnings" prior to the
amortization.
He added that new, integrated product should be released by JDS
Uniphase "within six months." He would not provide any sales
projections for the new product line.
"This looks like a solid plan, consistent with the direction in which JDS'
customers are moving," said Credit Suisse First Boston's Michael
Urlocker. "Equipment companies like Nortel are trying to get out of the
manufacturing and components side of their business. By combining,
JDS and Uniphase are building a broader line of components with more
value-added elements."
Duncan Stewart, manager of Toronto's Navigator Technology Fund,
agrees.
"This is a must-own company," he said of the new entity. "There are
(equipment component) shortages out in the market, and this allows
companies like Nortel and Lucent comfort in time to market."
Indeed, industry research suggests the market for JDS Uniphase's
product will grow from more than $3 billion to $6.8 billion in the next
four to five years. JDS Uniphase is expected to dominate the industry.
"If there will be a leader in this market, it will be us," said Mr.
Kalkhoven.
Jozef Straus, co-founder of JDS Fitel, and Mr. Kalkhoven began
discussing a possible deal early last year. Mr. Straus says they decided
to merge "to provide more complex solutions to our customers."
Mr. Kalkhoven added: "To grow both companies, we would have
actually had to extend our product lines into each other's territory, which
would only have wasted R&D dollars.
"By combining the companies ... the benefit lies to our customers and
allows us to have more R&D dollars to spend on development."
The new company will keep both its head offices in Nepean and
California. Mr. Kalkhoven will be named chief executive while Mr.
Straus will become president and chief operating officer.
The deal is still subject to shareholder and regulatory approval.
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