Squeeze play

The four executives arrayed before the audience on the “Bold Moves and the M&A Stories behind Them” panel at the Optical Society of America/Lightwave Executive Forum last month earned their places thanks to the aggressiveness with which their companies had shopped for new assets over the past few years. But while Harry Bosco of Opnext, Arvind Chhatbar of Enablence Technologies, Hong Hou of Emcore, and Jerry Rawls of Finisar certainly had stories to tell, the audience of executives and analysts appeared more interested in what the panelists could tell them about what the future holds for the community in the way of meaningful consolidation.

“This industry doesn't need to be consolidated, it needs to be decimated,” said one venture capitalist at the reception after the event.

“Yeah,” said someone else. “It needs a plague.”

But it's likely that the downturn will have more in common with a nasty cold than an outbreak of influenza, at least as far as significantly shrinking the number of major players in optical communications, particularly though M&A. In particular, Finisar's Rawls said he doesn't expect to see anything on the scale of his company's merger with Optium this year, and no one on the panel disagreed with him.

That's because for every incentive the current economic environment provides for a company to sell, it creates a corresponding obstacle to finding a buyer. Yes, there should be plenty of companies available at bargain-basement prices. However, there won't be an equally large number of companies with money (or stock) to spend. Cash is an extremely precious commodity these days, and executives will be reluctant to part with it regardless of how tempting a potential acquisition's price tag.

That doesn't mean there won't be any deals. But those who do have spare change will hold all the leverage when it comes to choosing which property to buy�and on what terms.

And the panelists made it clear that they're not interested in buying market share. While analysts say that meaningful consolidation won't happen until production capacity leaves the market (as opposed to merely changing hands), no one wants to spend money just to take out a competitor. The only realistic hope for the shrinkage financial analysts crave appears to be through vertical integration, which some executives hinted might occur in selected instances this year.

That may not be entirely true. Acquisition isn't the only way to leave the market, just the most pleasant. With credit tight, private companies in particular are vulnerable to running out of the cash necessary to maintain operations. These firms run the risk of having their investors decide to cut their losses. The result will be shuttered doors and asset auctions.

The industry certainly would benefit if a way could be found to remove several actors from the fiber-optic playbill. Yet while the current economy certainly puts the squeeze on every company in the space, from component supplier to systems house, it also constrains the agents through which change could occur.

There will likely be fewer companies at next year's OFC/NFOEC. But there won't be fewer complaints about the number of companies that remain.

Stephen M. Hardy
Editorial Director
& Associate Publisher
[email protected]