JDSU management details split, M&A possibilities

Management at JDSU (NASDAQ: JDSU) promised attendees of an analyst meeting September 11 that the independent communications and commercial optical products (CCOP) company it plans to spin out by the third quarter of 2015 will be debt free and adequately stocked with cash. Yet management left several questions unanswered – or at least not answered to the satisfaction of the audience. A principle area of dissatisfaction: the apparent unwillingness of either new company to be market consolidators.

The meeting saw JDSU senior management explain why it had decided to split now (see "JDSU to split in two") and what the two as of yet unnamed companies would look like. JDSU President and CEO Thomas Waechter, who will assume a similar position at the network enablement/service enablement/optical security and performance entity he called "Remain Co.," said that enough restructuring of the two entities had taken place to enable each to stand on its own. He described each group as a leader in its field, with CCOP ("Spin Co.") number one in telecom optical components and Remain Co. tops in field test. Both had successfully outsourced their manufacturing processes and, particularly in the case of Remain Co., had trimmed unprofitable products from its portfolio (see "JDSU drops some low-speed test products").

Both companies should be in a position to engage in acquisitions, which was a topic much on the minds of the attendees, particularly in the case of Spin Co. Both Waechter and Alan Lowe, CEO-designate of Spin Co., said that they were open to engaging in mergers and acquisitions with their respective companies-to-be, but that any acquisitions were likely to be strategic rather than a way to grab market share.

"We wouldn’t be a consolidator by any means," said Lowe in response to one of several questions about his unit’s M&A strategy and capabilities. He said that the new structure would enable Spin Co. to entertain large acquisitions, particularly if they were immediately accretive to the bottom line. However, he added such an acquisition would be more likely in the commercial laser realm – an area where he sees a significant opportunity for growth – than in optical communications.

Lowe also sees room for growth in data communications. Toward this end, he revealed that the company is working with a partner to produce a silicon photonics based product about which he declined to provide details.

For Remain Co., large acquisitions also are on the table, at least. Such transactions would appear most likely in the service enablement realm, where Waechter and David Heard, who runs JDSU’s current Network and Service Enablement business unit, see revenue expansion opportunities of their own.

Waechter added that while the JDSU board did not shop the CCOP before deciding to split it out, there was nothing that would prevent the board from considering an offer for it between now and the spin out.

The meeting left a few questions unanswered. These include just how much cash Spin Co. would have and how current joint costs would be allocated to each company. Lowe and Waechter both said that Spin Co. would have a "lean" organization, but declined to provide further details.

Also, while JDSU has promised about $50 million in net cost savings from the split, management did allow that cash costs of the operation could range between $75 million and $100 million.

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