More Consolidation in Optical Components

Last year, when I interviewed Jerry Rawls, CEO of Finisar, he shared with me Finisar’s strategy going forward:

The biggest new thing for us is our exposure in the telecommunications market. In the early days we did not want to enter that market because it was dominated by AT&T, Lucent, Nortel, but none of those companies make optical components anymore. They all went out of business.

On Friday morning, Finisar (FNSR) announced that it would acquire Optium (OPTM), a maker of optical modules and subsystems for telecom equipment for $212 million, and augment its own offering in that area.

This round of consolidation creates the largest supplier of optical components, modules and subsystems to the communications industry, with possibly the broadest portfolio. Optium shareholders will get 6.262 Finisar shares per Optium share, and the final ownership split in the combined entity will be 65% Finisar and 35% Optium. Optium’s CEO Eitan Gertel will become CEO of the the combined company, while Jerry Rawls will remain Chairman. This also takes care of Finisar’s succession planning, as Rawls has been running Finisar since the late eighties.

The combined company is expected to have about $612 million in annualized revenue, and a $2.2 billion addressable market, to grow to $3.2 billion by 2011.

Operationally, Finisar has a gross margin of 38.2% versus Optium’s 27.2%, and an operating margin of 7.5% versus Optium’s 2.9%. EBIDTA margin is 13.4% for Finisar, only 5.4% for Optium. Significant economies of scale due to Finisar’s operational excellence in its Malaysian manufacturing unit that has balance capacity is expected to drive a combined EBIDTA margin of 11.3% (non-GAAP).

Last quarter’s revenue mix for Finisar was 69% Enterprise Networking and Storage, 22% Telecom, and 9% Network Tools. For Optium, it was 82% Telecom and 18% Analog and CATV.

The Finisar-Optium combo, with its $612 million annualized revenue will now be ahead of its closest competitor, JDS Uniphase (JDSU)($544 million), as well as Opnext (OPXT)($266 million), Bookham (BKHM)($239 million), Avanex (AVNX)($198 million), Oplink (OPLK)($163 million) and Emcore (EMKR)($150 million).

Profit margin-wise also, this combo will be the most profitable of the lot (over 35% gross, over 11% EBIDTA), albeit in a market segment that is constantly squeezed by its customers. Opnext has the next best profitability figures, at 32.9% gross, 8.5% EBIDTA.

Finisar has had a tremendous cycle of a bootstrapped success story, followed by a telecom melt-down, turnaround, and is now gradually finding its stride back again. If you haven’t already done so, read my interview with Jerry Rawls, as well as founder Frank Levinson’s recounting of the story of how they bootstrapped the company.

A quick glimpse at the stock chart will tell you a lot about the ups and downs, but you have to read the interview to see what really went on over the history of the company.

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Disclosure: None

Comments

[Marshall:]

Shallow view of the industry and vision of the applications. Author need to be educated.

2008 May 19 09:57 AM

[mpharbold1:]

The combination of 2 poorly managed companies with almost no earnings does not equal 1 good company with great earnings. And correct me if I'm wrong, but isn't FNSR going to have to issue approximately 159.56 million additional shares for this merger to take place. The earnings per share of the resultant company will be diluted to almost nothing! The recent gain in FNSR is obviously good for OPTM shareholders, but this deal will not add long term value to FNSR shares.

2008 May 21 05:22 PM