Everybody loves a bargain. But companies rummaging through the technology bins of component startups and financially challenged incumbents face some tough decisions when evaluating potential acquisitions.
After the component shortages of 2000 were replaced in 2001 with excess inventories and weak demand, major industry restructuring began to sweep through the optical-component sector. Large players, including Marconi, Nortel Networks, Agere Systems, and ADC, sold off their component assets in 2002 and exited the market. Companies like Bookham Technology and TriQuint Semiconductor acquired portions of these businesses, increasing their portfolios and potentially raising their industry profiles. But did these companies get bargains or misstep into a market that may be unrecognizable when equipment spending returns?
"Buying assets at today's prices makes sense because they are unlikely to be any cheaper, but anyone who takes that path is going to have to have the resources to wait it out for up to four years to see profitability," says Lawrence Gasman, president and director of optical-component research at Communications Industry Researchers (Charlottesville, VA). "In the long run, there's probably room for two or three significant-sized components companies worldwide—JDS Uniphase will almost certainly be one. Nobody, including me, knows who the others will be."
"Capital went from billions of dollars to tens of millions of dollars over a period of 18 months, so it's given an opportunity for companies that were already moving toward expanding in this field to get in at a much lower-cost basis," observes Jeff Montgomery, chairman and founder of market researcher ElectroniCast (San Mateo, CA). "In the 1998 and 1999 span, we were working with several corporations—U.S. and overseas—that were looking to get into the fiber-optic field, and then as we got into the year 2000, they just really shelved all of that activity because the cost of getting in was prohibitive relative to what they could get. Now we are seeing those companies and others like them coming back into the bidding."
Major U.S. defense companies are among those showing some interest, adds Montgomery. "Generally, they already have a toe in the water because they require fiber optics for some of the military gear, and now is a good financial time for these operations," he explains.
Compound semiconductor device companies, including Vitesse, Cypress Semiconductor, and TriQuint, are also investing more in optoelectronic components. It makes sense, according to analysts, because active-component development is evolving toward semiconductor platforms (such as indium phosphide) and integration of ICs, which many believe will ultimately drive down component costs.
TriQuint (Hillsboro, OR) announced in October that it would acquire Agere's optoelectronics business (formerly Lucent's Microelectronics Group) for $40 million in cash. Agere's optoelectronic components—lasers, transponders, amplifiers, micro-electromechanical systems (MEMS), and passive devices—are largely targeted at long-haul, a market TriQuint already serves. The deal, which is expected to close this month, also includes license to all of Agere's patents in the optical space, intellectual property, some of Agere's manufacturing facilities (in Breinigsville, PA, and Matamoros, Mexico), and about 300 employees. Agere's revenue for its optoelectronics business in its 2002 fiscal year was $192 million. TriQuint executives expect revenue for the 2003 calendar year to be "north of $50 million."
"In the case of Agere, I think most people felt that whenever spending did resume the mix of products and the effort that Agere had mounted surrounding automation had positioned it well for truly integrated systems that address the IC side as well as the optical side. But at the end of the day they had a fairly substantial debt burden," says Kevin Slocum, managing director and head of communications research at SoundView Technology Group (Greenwich, CT). "They were losing all of their money on the optical side of the business because of the abysmal level of activity, and it was important for them to generate more favorable results in the near term."
Several companies looked at Agere's assets, according to analysts. But Agere needed to find a company like TriQuint, with the resources to support its optoelectronics customers, many of whom Agere also sells to in its IC business.
Bookham is another components company that has made some bold moves. After buying Marconi's struggling components division in 2001, it acquired portions of Nortel's components business (optical amplifiers and transceivers) in a deal valued at $108 million in October. The agreement involved $10 million in cash, 61 million Bookham shares, nine million warrants, assumption of $50 million in debt, and a commitment from Nortel to buy $120 million in components over the next 18 months. (Bookham had a similar arrangement with Marconi, where the company agreed to $43 million in component purchases when Bookham acquired its optoelectronics assets.) Nortel also shut down its tunable-laser business acquired from CoreTek in September. Bookham acquired tunable-laser technology in its Marconi purchase. Although many people question the risk involved in the deal, Bookham, for starters, is shutting down Nortel's Ottawa facility and moving that production to its own Caswell facility in the United Kingdom.
"There were some people who looked at [Nortel's] facility and said, 'They should pay me to take this,'" says Slocum. But after the fact, Slocum notes that one player who was made aware of Bookham's production plans conceded, "'That's a huge headstart, and that's something that we couldn't do when we looked at it.'" Adds Slocum, "Some of these transactions work just because the players are who they are, and it might be a deal that would work for nobody else."
As capital has dried up, companies showing any sort of stability are besieged by components startups in various degrees of trouble, hoping to be acquired. "In general, they are available anywhere ranging from free—where you take over the liabilities—up to 5-10% of the original investment," says Montgomery. "Some things are fairly obviously bargains, but it takes careful assessment to understand what one is really getting."
Whether an agreement makes sense depends on synergies between the companies, the market situation for the technology, and the technology's stage of development. "Is the technology producible or is it a bunch of things in the lab with a bunch of data?" says Montgomery. "Is it pluggable into existing applications? What is the nature of the management group? How come they got into this trouble, and if you add them, are they going to be an asset to management or not?"
Many such negotiations are taking place. Like all the sources contacted here, Montgomery declined to offer names of the companies that may be involved. But he was clear that now more than ever "an acquisition has to have something that is really useful at the start rather than just hopes of getting there some time."