The Coherent, Inc. (NASDAQ:COHR) board of directors has accepted the most recent offer received from II-VI Inc. (NASDAQ:IIVI) for control of their company – despite the fact that original suitor Lumentum Holdings (NASDAQ:LITE) offered more money. The Coherent board has notified Lumentum that they are terminating the purchase agreement they signed with the company (originally in January, updated March 9), which Lumentum has acknowledged. II-VI will now acquire Coherent for $220.00 in cash and 0.91 of a share of II-VI common stock in a deal expected to close by the end of the year.
Coherent will pay Lumentum a breakup fee of $217.6 million after turning down Lumentum’s latest offer of $230 in cash and 0.6724 shares of Lumentum stock for each share of Coherent. Lumentum’s bid was worth $283.12 compared to the $282.21 Coherent accepted from II–VI. Lumentum filed its most recent offer March 22. Unlike in previous rounds, II-VI decided not to sweeten its offer, indicating that the bidding had reached its conclusion.
The wording of Coherent’s announcement that it had accepted II-VI’s proposal indicated that money wasn’t the only criterion used in evaluating the final two bids. “In making its determination, the Coherent board of directors evaluated the comparative benefits and risks of the II-VI and Lumentum proposals, including the near-term and long-term financial opportunities and risks presented by each proposal, the potential synergies available through a combination with each company, and the complementary businesses of each company,” the board stated in the release.
Within this context, II-VI had pointed out when it submitted its opening offer that there was less overlap between its product lines and Coherent’s versus that between Coherent and Lumentum – particularly in China, where regulatory approval by China’s State Administration for Market Regulation (SAMR) has proven difficult to acquire in a timely fashion in several instances.
“We are pleased to have reached an agreement with Coherent to create a global leader in photonic solutions, compound semiconductors and laser technology and systems. Together, we will have significant opportunities to accelerate our growth through complementary technology platforms, strengthen our competitiveness by using our combined scale across the value chain, benefit from deeper market intelligence and expertise, and further diversify our businesses by end market and geography,” commented Dr. Vincent D. Mattera, Jr., CEO of II-VI. “Moreover, the combination of II-VI and Coherent will increase our collective exposure to irreversible megatrends for decades to come. We are excited to welcome the talented Coherent team to II-VI and look forward to working together to deliver significant value to all stakeholders, including both companies’ shareholders, customers, employees, and business partners.”
A really big company
II-VI says the combined company will have annual revenues of approximately $4.1 billion initially, with an enhanced ability to tackle a combined addressable market of approximately $25 billion. II-VI predicted the combined company will achieve $250 million in annual cost synergies within 36 months of close and that the deal will be accretive to non-GAAP earnings per share in the second year following close.
II-VI may be underestimating its abilities to derive synergies, according to Harsh Kumar of Piper Sandler, who maintained his “Overweight” rating on II-VI’s stock after the deal’s announcement. “Given II-VI’s track record of successful integrations, we feel the synergy timeline and/or the cost synergy target could prove to be conservative,” wrote Kumar in a note. “In addition to the cost savings, the deal will add further diversification to the II-VI revenue stream, reducing the combined company’s exposure to the communications market.”
The deal will be financed via a combination of cash on hand, $5.4 billion of fully committed debt financing, and a convertible preferred equity investment of at least $1.8 billion from Bain Capital, which will reduce leverage.
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