While the initial US$41 billion price tag on the proposed merger of optical component makers SDL and JDS Uniphase, reported to be the largest ever among technology companies, captured most of the attention last week, industry experts said the deal could significantly accelerate the construction of the next generation of the Internet.
Beyond simply increasing the mass of JDS Uniphase, already one of the largest suppliers of components for optical networking gear, combining the assets and expertise of the two companies could fast-forward evolutionary advancements in manufacturing, component integration and other factors that would help reduce the cost and increase the availability of optical equipment.
Two heads better than one "The basic idea is that instead of two companies fighting each other in the marketplace, they could put their resources together to move the industry to the next level," said Jay Liebowitz, an analyst at research firm RHK.
Officials at both companies, largely previewing their defense against antitrust scrutiny by US federal regulators, said the merger is good for customers and the industry. "We believe this benefits our customers and the markets we serve," said Jozef Straus, cochairman and chief executive of JDS, because the merger will result in new products and increased manufacturing capacity.
JDS and SDL are two of the larger makers of optical components - the chips, amplifiers, lasers and other parts - used in optical networking gear, such as Dense Wavelength Division Multiplexing equipment. Both companies -as well as Corning, the third major competitor in the space - have been making acquisitions at a torrid pace for the past year in order to meet the demands of optical system makers, such as Alcatel, Lucent Technologies and Nortel Networks.
JDS has been particularly aggressive, buying up nine companies in the past year, each -- for the most part -- at a higher price than the last. The SDL acquisition, if it meets regulatory approval, will be JDS' 10th and largest acquisition.
It would be difficult to argue that the merger of two of the biggest players in the semiconductor space, such as Intel and IBM, would benefit the marketplace by accelerating the pace of technology advancement. In the optical space, however, the manufacture of optical components is at an early stage of maturity, and much of the actual manufacturing is done by hand.
The laborious nature of optical component assembly, combined with the incredible demand for optical networking equipment, has created a backlog of orders from network operators struggling to build out their networks to meet the seemingly insatiable demand for bandwidth.
By combining product lines to create new components and synthesising manufacturing processes to speed up production, JDS officials could make the case to federal regulators that the proposed merger will accelerate the evolution of the Internet into the global communications and commerce phenomenon it is expected to become, Liebowitz said.
"If you want the Internet to have higher bandwidth and be faster," Liebowitz said, "having talented engineers from both companies working on the future instead of beating each other up is in the US "best interest."
Despite the positive spin placed on the merger by company officials in a press conference early last week, investors initially demonstrated skittishness over the proposed transaction, and the value of the all-stock deal declined to US$36 billion the day after it was announced. In additional to regulatory concerns, industry analysts said investors were worried about potential product overlap and the possibility that the integration of the companies might prove too daunting for JDS, which recently completed a US$15 billion acquisition of E-TEK Dynamics.
Straus, who took over the chief executive role at JDS following the abrupt resignation of Kevin Kalkhoven a few months ago, assured analysts that the methodology JDS used to integrate its past acquisitions would be equally effective in absorbing SDL.
On the regulatory front, Michael C. Phillips, senior vice president of business development and general counsel at JDS, said the company, which made concessions to the Department of Justice to gain approval of the E-TEK acquisition, will leverage its experience to negotiate approval for the SDL deal. Phillips said it was too early to talk about possible divestitures of product lines to appease federal regulators, but indicated that JDS would consider such requirements.
Despite the conservative wind that has seemed to be blowing through the technology industry following the antitrust charges against Microsoft and the expected breakup of the WorldCom-Sprint merger, most experts believe the marriage of JDS and SDL will eventually happen.
Scott Clavenna, an analyst at research firm Pioneer Consulting, said that the merger will not attract as much federal scrutiny as Microsoft, or WorldCom and Sprint, because of the size of the companies involved.
"These are three companies [JDS, SDL and E-TEK] that are just not that big," Clavenna said. "They just seem big because they have big market caps." Indeed, the combined 1999 revenue of all three companies adds up to slightly more than a half billion dollars. Lucent, by contrast, which purchased Ascend Communications for US$25 million two years ago, raked in revenue of about US$38 billion in 1999.
Also, Clavenna said, the nature of the optical component business, in which competitors are also partners, limits the influence of one company. "It's such a competitive market and so supply constrained," he said, "companies are buying from whomever they can get parts from, whether it helps the competition or not."
JDS officials expect to close the SDL acquisition in December. ENDS
