The cliché says that where there’s smoke, there’s fire. However, the boom and bust of the optical communications space we’ve experienced since the end of the 1990s has taught us that where there’s smoke, there’s frequently more smoke and maybe a few mirrors. So am I wrong to feel heartened by the latest smoke signals on the financial and mergers and acquisitions front?
First, we’re finally starting to see some consolidation-although mostly in the test and measurement space as opposed to areas where it has been long expected, such as components. Nevertheless, someone has to lead by example, and JDS Uniphase got things rolling with its acquisition of Acterna, which closed early last month. Anritsu followed this lead with an announcement it will acquire NetTest A/S. Agilent Technologies, meanwhile, garnered the most headlines by selling its Semiconductor Products Group (SPG) to a pair of private equity firms, Kohlberg Kravis Roberts & Co. and Silver Lake Partners, for $2.66 billion. The divestiture will enable Agilent to focus on its core test and measurement competencies; an extra $2.66 billion not only funds a lot of product development, but also provides a war chest for acquisitions, so further consolidation may follow.
SPG, meanwhile, also bears watching. As its name implies, the group’s primary expertise resides in semiconductors. However, SPG also includes Agilent’s former datacom optical-transceiver product line. This activity reaps a significant amount of revenue; in fact, Agilent by most accounts occupies the number two position in worldwide transceiver sales behind JDS Uniphase. SPG management and its new owners will have to decide whether optical transceivers and semiconductors make a felicitous match. Intel so far remains committed to a similar pairing, while Vitesse tried this approach and quickly abandoned it.
While the number of optical test equipment companies shrinks, the component and system spaces remain unwieldy. However, younger companies have begun to see the benefit of pairing up, with venture capitalists offering their seals of approval in the best way available: more money. For example, laser developers ASIP and T-Networks merged to create Apogee Photonics, an act rewarded with $9.7 million in new funding. Continuum Photonics and Polatis announced they will pool their optical switching expertise in a venture whose name had still not been announced at press time. Once again, the two firms’ existing investors plan to kick in more money.
Regardless of whether we’re talking about test, components, or systems, the growth in mergers is a good sign. Last March, in the wake of the difficulties experienced between Finisar and Infineon and Oplink and EZconn, we reported that mergers are tough to pull off-in fact, often don’t even begin-in depressed markets. One plus one has to equal more than two (and certainly more than one-and-a-half) before mergers make sense. The fact that we now see companies successfully joining forces surely is a sign that managers and investors believe the optical space is picking up.
The uptick in the flow of venture capital into the space backs up this opinion. The sale of SPG is the most salient example, but smaller deals also provide evidence that optical communications is no longer seen as a loss leader. Picolight’s ability to add $14.5 million in August to cap a $27.5-million round provides a good example. Meanwhile, Alphion topped off its $12.1-million series C funding with an extra $1.5 million, a series that also included new investors. Not to be outdone, Cortina Systems, which produces ICs for Ethernet and SONET line cards, raked in $30 million in series C financing with the help of new and existing investors.
Much of economics is psychological; confidence comes as much from emotion as data. However, the data on the optical market has begun to prop up the confidence this type of venture capital and M&A activity requires. Dell’Oro Group reported last month that optical transport equipment revenue grew 10% in the second quarter of this year versus the previous quarter and 28% over the same quarter last year. The market research firm now predicts 18% growth for the year. “It looks like the tide has turned and the optical market is on the upswing again,” said Jimmy Yu, senior analyst for optical transport research at Dell’Oro.
The most recent round of quarterly reports shows positive signs as well, particularly in the components space. Revenues generally have picked up quarter on quarter and year on year, with companies like Emcore leading the way.
All of that doesn’t mean everyone is out of the woods yet or that even a majority of companies have regained profitability. But clearly, the smoke we’re seeing is finally coming with a bit of heat behind it.
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