JDS Uniphase to Buy SDL for $41 Billion
In the largest high-tech deal ever, optical-network leader JDS Uniphase said Monday that it agreed to acquire optical-component supplier SDL Inc. for $41 billion in stock. If completed, the buyout would create a technology titan on the strength of the fast-growing market for high-speed networks that send data on light impulses over hair-thin glass fibers.
But investors punished JDS shares amid concern that the proposed acquisition--the latest in a takeover frenzy by the San Jose-based company--might be challenged by antitrust authorities and that JDS was paying too much. The company’s offer of 3.8 shares for each SDL share was worth $441.52 a share when it was announced early Monday, nearly 50% above SDL’s closing price of $295.31 on Friday.
JDS shares fell nearly 13%, or $15.06, Monday, to $101.13 in Nasdaq trading, reducing the size of the deal to $35.6 billion by day’s end. SDL shares jumped almost 9%, or $25.38, to $320.69.
Analysts called the price understandable, given the super-heated market for equipment that can manage vast streams of Internet data and telephone and TV signals. SDL, which produces semiconductors, lasers and amplifiers to boost signal strengths on optical networks, also was rumored to have been an acquisition target by JDS competitor Corning Inc.
“You’ve got to put that premium in perspective--both companies are extremely profitable and fast growing,” said Todd Koffman, an analyst with the investment firm Raymond James & Associates in St. Petersburg, Fla.
JDS reported sales of $395 million in the quarter ended March 31, up fivefold from a year before, while operating profit hit $128.7 million, a fourfold increase from a year earlier. SDL, also based in San Jose, saw its first-quarter sales double, to $72.2 million, as profit surged sevenfold over the last year, to $14.2 million.
Any combination that can help meet the seemingly insatiable demand for “high-bandwidth” networks that form the backbone of modern communications systems is likely to succeed dramatically, analysts agreed.
“The market is so strong right now and there is so much demand for optical components” that even a $41-billion acquisition might be absorbed without a hit to JDS’ bottom line, said Charles Willhoit, an analyst with the investment bank J.P. Morgan & Co. in San Francisco.
Willhoit cautioned that investors may logically wonder, “Is JDS biting off more than it can chew?”
The company just completed a $20-billion acquisition of E-Tek Dynamics, another optical supplier, on June 30, its fourth acquisition in the last six months.
But Willhoit added: “JDS Uniphase is a company with a very deep management team. If anyone can pull it off, they can.”
That’s assuming the deal passes muster with antitrust officials, who are charged with regulating a rapidly transforming sector in which the chief competitors have overlapping product lines that often make them each other’s largest customers.
JDS, which builds a wide range of optical components--including semiconductors, lasers and modulators, which regulate the flow of light-based data streams--both sells to and competes with telecom behemoths Lucent Technologies and Nortel Networks. But because each of those companies consumes much of its own equipment, JDS is the largest seller of optical parts.
The acquisition of SDL would extend that lead substantially by giving the combined companies a nearly complete line of components to run optical networks.
JDS President Jay Abbe said he believes the deal would pass Justice Department scrutiny because the customers of the combined companies would benefit from the increased efficiencies that would lead to greater production capacity.
However, he acknowledged that the two companies compete directly in two areas: the manufacture of parts that modulate optical signals and the making of semiconductors used for lasers in optical amplifiers--components that heighten the intensity of light beams traveling over long distances.
“We believe that there is sufficient technology evolution, a sufficient technological rate of change and very low barriers to entry, so this is not anti-competitive,” said Abbe, who noted the proliferation of optical-component start-ups.
But some analysts suggested that JDL could face painstaking antitrust scrutiny. That could lead to divestiture of certain product lines, such as undersea cable components, which SDL and JDS supply along with a small number of other companies. Or the government could press for guarantees that JDS would deliver a quota of parts to other suppliers, who could then resell those parts to network operators.
Even if the deal receives approval, the smooth integration of SDL represents JDS’ largest challenge to date. It immediately follows the departure of JDS’ longtime chief executive, the architect of its rapid-growth strategy. Kevin Kalkhoven, regarded as an industry visionary, left the company in May and was succeeded by Jozef Straus, co-founder of JDS Fitel, which combined with Uniphase Corp. last year.
And a large acquisition can be doubly complex in the explosive optical market, analysts said.
“It’s an execution game for JDS Uniphase. They have a lot of companies recently acquired, small and large, while doubling production capacity every six months,” Willhoit said.
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Fiber-Optic Play
JDS Uniphase (ticker symbol: JDSU) had been one of the market’s hottest stocks over the last year, rocketing as high as $153.38 before the spring sell-off in the Nasdaq market.
Monthly closes and latest:
Monday: $101.13, down $15.06
Source: Bloomberg News
