JDS Uniphase gives up Zurich
for SDL deal
You've got to give a little to get a little, the saying
goes. In order to win U.S. Justice Department approval
of its merger with 980-nm pump-laser manufacturer SDL,
Inc. (San Jose, CA), optical components specialist JDS
Uniphase Corp. (San Jose, CA) has sold its own 980-nm
pump laser subsidiary in Zurich, Switzerland, to Nortel
Networks (Brampton, Ontario) in a stock deal. The deal
also involves certain properties in Poughkeepsie, NY,
as well as a series of purchase and supply contracts
between the two companies; a provision includes between
10.9 and 16.4 million additional shares as deferred
consideration to be paid in the event that Nortel does
not meet certain purchase commitments by December 2003.
On the day of the announcement, the deal was valued at $2.5 billion
plus $500 million in deferred consideration. The deal closed on 13
February, when Nortel issued about 65.7 million shares of common stock,
worth about $2 billion based on a closing price of $29.75 per share.
Just days later, the company issued a loss warning and significantly
revised projected earnings and revenue growth. The announcement
triggered a flurry of shareholder lawsuits and sent the stock price
plummeting to just over half its earlier value.
The activity has sent rumors flying about the JDS Uniphase response. As
of this writing, the Zurich acquisition is worth $1.3 billion up front,
down 48% from the price quoted when the deal was first announced.
According to Reuters, JDS Uniphase's Josef Strauz has said that the
company is reportedly back in talks with Nortel over the deal, though
Nortel media spokesperson Vicki Contavespi says that the company
considers it closed. JDS Uniphase media representatives could not be
reached for comment.
According to Brian Viccioni, managing director at BMO Nesbitt Burns
(Toronto, Canada), JDS Uniphase still benefited handsomely from the
sale. "They paid $45 million for the facility in 1997," he says.
"That's over 28 times return on your money over three years."
"JDS Uniphase accomplished a couple of things [with the sale]," says
Charlie Willhoit, senior equity analyst at JP Morgan H&Q (San
Francisco, CA). "They put the business in good hands and lined up
long-term contracts with a big customer." Media hints to the contrary,
Willhoit considers it unlikely that JDS Uniphase will consider legal
action on the deal. "You don't want to sue your biggest customer," he
says. "It is what it is."
focus on photonics
Corning, Inc. (Corning, NY) has unveiled plans for a $150 million
capital investment in its Corning Optical Technologies Italia (Corning
OTI) operations, which specializes in lithium niobate modulators, pump
lasers, certain specialty fibers, and fiber gratings. The company also
has earmarked another $400 million to build its sixth optical-fiber
manufacturing facility in Oklahoma City, OK, slated to come on line in
2004. The news comes on the heels of Corning's announcement to cut 354
temporary jobs at its United States–based optical-components plant.
Despite rumors of the sky falling on Wall Street, private financing
continues to be available. Agilent Technologies (Palo Alto, CA) has
formed Agilent Ventures, a technology development company that plans to
invest between $2 million and $10 million in selected companies for a
total of $100 million per year. BTI Photonics, Inc. (Ottawa, Canada)
raised $12.1 million in capital, and Fiber Optic Network Solutions
Corp. (FONS; Northboro, MA) raised $27.5 million in second-round
The thermal systems unit of Silicon Valley Group (San Jose, CA) is
taking aim at telecom, shipping an
atmospheric-pressure-chemical-vapor-deposition (APCVD) tool that will
be used to fabricate optical waveguides and optical
micro-electro-mechanical systems (MEMS) components. Meanwhile, company
shareholders approved the merger of SVG with ASM Lithography
(Veldhoven, Netherlands). The deal already has received antitrust
Liquid-crystal switch specialist Chorum Technologies, Inc. (Richardson,
TX) has signed an agreement to acquire Polytronix, Inc. (Richardson,
TX), which manufactures liquid-crystal displays (LCDs). "It gives us a
prime source for liquid-crystal technology," says Wayne Mei of Chorum.
The company builds small-scale switches that use nematic liquid crystal
as a voltage-toggled polarization controlling material. It will fold in
Polytronix as a wholly owned subsidiary headed by current president and
CEO Guohe Huan. Polytronix will retain its name and its core business
details on displays
Speaking of displays, LCD manufacturers Toshiba (Tokyo, Japan) and
Matsushita Electric Industrial Co. (Osaka, Japan) have inked a
joint-venture agreement to manufacture low-temperature polysilicon LCD
panels in Tampines, Singapore. Incorporated in March with an initial
capitalization of $431 million, the venture will be funded 67% by
Toshiba and 33% by Matsushita. Slated to begin production in July 2003,
the factory will produce 55,000 730 mm * 920 mm glass substrates per
month by FY '03. The initial investment in the facility is expected to
be $1.06 billion.
The state of Pennsylvania has awarded a $1 million grant to establish a
Center for Optical Technologies at Lehigh University (Bethlehem, PA),
which plans to develop a multi-institutional center for education,
research, and technology transfer. Collaborators will include Lucent
Technologies, Inc. (Murray Hill, NJ), Corning, Inc. (Corning, NY), and
Sycamore Networks (Chelmsford, MA). The Department of Community and
Economic Development's Pennsylvania Technology Investment Authority
(PTIA) awarded the grant to Lehigh University in partnership with Penn
State University, Northampton Community College, and the Ben Franklin
Technology Partners of Northeastern Pennsylvania. The grant is
supplemented by matching funds from the federal government.
And finally, the U.S. Supreme Court is debating whether scanning a
home with a thermal imager constitutes a violation of privacy. Law
enforcement officials in Florence, OR, scanned Danny Lee Kyllo's home
looking for thermal signatures from the grow lights he reportedly was
using to cultivate marijuana. Through the scan, officials gathered
sufficient evidence for a search warrant that later led to Kyllo's
conviction. The case has been pushed to the Supreme Court on appeals.
Florence is just three hours away from Portland, OR, home of thermal
imager manufacturer FLIR Systems, Inc.
detectors battle it
out; optical wireless set to surge
In a global image-sensor market expected to rise from $2.4 billion in
2000 to more than $6.5 billion by 2007, the trade is poised for change,
says a new report from Frost & Sullivan (San Jose, CA). The numbers
represent just the sensor and supporting circuitry, without packaging.
Ever since complementary-metal-oxide-semiconductor (CMOS) technology
began to challenge charge-coupled-device (CCD) technology, the debate
has raged over which approach will prevail. The answer appears to
depend on the application: CCDs provide top performance for high-end
applications, but CMOS technology offers economic advantages for less
According to analyst Nicole Wagner, the market will realign itself over
the next six years. In 2000 the market for CCD image sensors was $1.8
billion, which should rise to $1.9 billion by 2007. Over the same
period, the CMOS market share should rise from $631.6 million to a
staggering $4.6 billion, jumping from a 26% market share to a 71% slice
of the pie. "The majority of the overall market growth is due to CMOS,
not CCD," Wagner notes.
CCD technology will retain its hold on the scientific and
high-performance market, applications for which it is traditionally
well-suited. The gains for CMOS will come in the lower- end—but
higher-volume—niches, particularly for emerging markets. Wagner cites
automotive and hand-held devices as examples. "Those two are going to
be using CMOS because they've never used CCDs. CMOS is probably going
to take over the lower-end applications." The change reflected by the
report provides merely a glimpse at what is ahead. "The drop [in the
CCD market] is not as large as it will be after the forecast period,"
MEMS on the move
Tiny but mighty, micro-electro-mechanical-systems (MEMS) devices are
poised to grab territory in the consumer market, with sales for that
sector expected to reach $1.5 billion by 2005, up from $200 million in
2000, says a report from Cahner's In-Stat Group (Scottsdale, AZ).
Applications include digital televisions and displays, motion/vibration
sensors, and data-storage devices. Overall, the global chip-level MEMS
market should hit $7.1 billion by 2004, up from $3.1 billion in 1999.
Meanwhile, over the same period, the photonic switching sector will
surge from $2 million to $1 billion, says senior analyst Marlene
Bourne. An updated version of the global MEMS report is slated for
release by the group later this month.
"As a whole, the technology has kind of reached a turning point,"
Bourne says. "In the next three years, the promise of the technology is
going to become much more of a reality." Look for more on MEMS in the
May issue of oemagazine.
It wouldn't be a Market Trends column without something on telecom. The
emerging carrier market for free-space optical communications
systems—wireless optical network—is driving growth for the technology.
Global transceiver revenues are expected to jump at a compound annual
growth rate of 90% over the next four years, rising from the 2000
figure of $118.8 million to $3 billion by 2005, reports Allied Business
Intelligence (Oyster Bay, NY) in a new market survey.
The technology has been used for years in the campus/enterprise
network environment, but according to Andy Fuertes, ABI vice president
of communications technologies, a major shift is underway. "The real
growth opportunity is in the access network and wide area network
(WAN)." By the end of the survey period, access networks will represent
66% of the market, or about $2 billion.
Although a pragmatic short-term solution, wireless technologies
eventually will be supplanted by land lines. "That's been the history,"
Fuentes concedes, but he doesn't expect it to happen anytime soon.
"[Laying fiber] in the local loop is going to be a long and costly
process. Instead of five to seven years, the transition is going to
take more like 15 to 20."
food chain falters
A year ago the optical networking sector was the darling of Wall
Street. Fund managers disillusioned with dot-coms flocked to optical
companies boasting market demand for real products, companies logging
strings of consecutive high-growth quarters. In the resultant frenzy,
stock prices soared. Then last fall a drift began in the sector that
has since turned into an all-out slide. Stocks trading in the triple
digits last spring are now down by an order of magnitude. Despite the
current bleakness in the market, optical-networking market-
research reports predict continuing growth in bandwidth and
equipment demand. It's hard to understand what is happening, but by all
accounts it appears to be a temporary—albeit painful—phase.
The change appears to be rooted in a softening U.S. economy and in
carrier spending, but at a more fundamental level, it has to do with
confidence. In 2000, bandwidth demand gave carriers a ferocious
appetite for optical-networking equipment, and the sales propagated
right down the food chain. "The chance of any of these [components and
equipment vendors] missing their earnings numbers was slim to none
because we all knew the demand for their stuff was out of control,"
says Charlie Willhoit, an analyst with JP Morgan H&Q (San
Francisco, CA). The normal Wall Street model considers a "reasonable"
stock price to be approximately the expected per-share earnings times
the company's projected growth. Instead, last year the stock prices for
optical component and optical equipment vendors shot up to 200 times
and 300 times earnings. "You had a whole sector of companies where
growth was very fast and meeting earnings expectations was almost
guaranteed," Willhoit says. "If you're a fund manager, you're going to
buy those stocks no matter what the price is."
The whole house of cards was held up by confidence that the carrier
demand was solid. Then last fall, carrier orders began to falter as the
U.S. economy softened, and carrier business models came into question.
When bellwether companies like Nortel Networks (Brampton, Ontario) and
Cisco Systems, Inc. (San Jose, CA) gave indications of uncertainty in
inventory flow, the news sent a cold breeze blowing through the house
of cards. "The further we got into December and January, the more we
realized that the carriers themselves didn't know what their own
spending patterns were going to be like," Willhoit says. Suddenly,
uncertainty hit the market, shaking vendor revenue and earnings
projections. "When [price-to-earnings ratios] are this inflated, the
inherent assumption as an investor is that companies are not going to
miss numbers." When major players did just that, stock prices in the
Carrier demand, once a given, is now considered weak at best. "It's
very difficult to raise capital in this market, and that's going to put
a further squeeze on the carriers, which will ultimately trickle into
weakness on the equipment side," says Brian Viccioni, managing director
at BMO Nesbitt Burns (Toronto, Canada). "We look at how much money the
carriers have in their balance sheets, and it's not that much."
Viccioni says his firm is projecting one carrier bankruptcy a month
in 2001. Willhoit speculates that it will be worse. "You have to
understand, we had 5,000 competitive local exchange carriers (CLECs) in
the United States," Willhoit says. "Companies like Level 3 and Qwest
and others are in a very good spot to be major competitors in the long
term, but the other 4,980 of these guys are likely to either get bought
or go under." On the bright side, the bankruptcies may not have as
extreme an effect as some think, Willhoit adds, noting that more than
90% of all the spending comes from the top 15 or 20 carriers.
supply and demand
Analyst Stephen Montgomery of ElectroniCast Corp. (San Mateo, CA)
takes a different view of the current market weakness. "This is a very
unusual industry—the supply is affecting the demand," he says,
referring not to the supply of components but of people. "The telco
operators have a lack of engineers that can actually specify what they
need. There's a demand, but nobody's home to actually decide what they
need and where to put it." In part, he says, the situation is caused by
the movement of engineers from carriers to high-dollar equipment and
component vendors. "This is an example of the supply of people causing
a demand problem," he says.
No matter what the cause, many analysts agree that the situation is
temporary. "The demand for bandwidth is there, it's just a question of
economics," says Daniel Matviyenko, technology analyst at Sands
Brothers (New York, NY).
"It's likely to be a relatively short-term issue, short term meaning several
quarters," Willhoit suggests. "I firmly believe we're
in the very early days of what's going to be a lot of
growth for many years to come in the photonics industry
in general. When carriers start spending more money
again, optics is going to be one of the biggest beneficiaries."