JANUARY 27, 2009 By Stephen Hardy -- A merger that has been anticipated, urged, analyzed, and somehow unconsummated for more than two years will finally come to pass. Optical component and subsystem vendors Bookham, Inc. (search for Bookham) and Avanex Corp. (search for Avanex) have announced a definitive agreement to merge in an all-stock transaction. Avanex shareholders will receive 5.426 shares of Bookham common stock for every share of Avanex common stock and will own approximately 46.75% of the combined company.
Based on the closing price of Bookham stock on January 26, 2009, the total consideration to Avanex shareholders would be $35.4 million, or $2.17 per share.
The deal is expected to close in three to six months, at which point the combined companies will operate under a new name. The board of the new company will have four seats occupied by Bookham representatives, including current director Bernard Couillaud as chairman. Bookham's current president and CEO, Alain Couder, will hold the same titles in the new company and have a seat on the new board as well.
Avanex will have three seats on the board, including current President and CEO Giovanni Barbarossa. Barbarossa will remain with the new company "for a few months" after completion of the merger in an advisory role, Couder said during a conference call to announce the agreement and review Bookham's Q2 FY09 results.
The new company will be split into three divisions. Bookham's Executive Vice President and General Manager, Telecom Division Adrian Meldrum will lead what a presentation slide labeled "Telecom: Division 1," while "Telecom: Division 2" will be headed by Avanex Vice President of Product Management Richard Smart. The product lines that will fall within each division were not revealed during the conference call. Yves LeMaitre, now Bookham's vice president of telecommunication sales and vice president of corporate marketing (and a former Avanex employee), will head the non-telecom division, which will likely comprise Bookham's current product lines in those areas.
Bookham's Andy Carter will serve as CTO.
Couder and Barbarossa stressed the combined strengths of the two companies, touting the pairing's tunable and fixed lasers, modulators, micro-optics and filters, amplification technology, fixed and tunable dispersion compensation technology, and subsystems as "market leading." Couder allowed that the companies had some catching up to do in transmission modules and wavelength-selective switches. Nevertheless, Couder placed the combined entity in the Number 4 slot in terms of market share, behind Finisar, JDSU, and Opnext.
Couder also said the new company will be adjusted EBITDA positive in the first full quarter after the close of the transaction and will generate $7 million of quarterly cost savings by the end of the fourth full quarter after the close. He estimated restructuring costs at less than $7 million.
The two companies have pursued different manufacturing strategies, with Bookham taking a vertically integrated path and Avanex pursuing outsourcing, primarily with Fabrinet. Couder said that future production decisions will be made on a case-by-case basis. He added that the new company likely will combine internal production with outsourcing.
Couder naturally has a bright future in mind for the company. On the expectation that the upcoming March quarter will represent the bottom of the current downturn, Couder says he anticipates that a year after the merger closes, the new company will show a non-GAAP operating margin of 7% and a gross margin of 31%. This would represent a significant turnaround from both companies' recent performances; based on the 12 months ending last September, Bookham's non-GAAP operating margin was negative 5% and Avanex's was minus 2%.
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