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JDS offers $41B for SDL
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July 10, 2000: 5:20 p.m. ET
JDS offers 50% premium for rival fiber-optic components maker
By Staff Writers David Kleinbard and Luisa Beltran
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NEW YORK (CNNfn) - In the largest ever merger of technology companies, optical networking firm JDS Uniphase Corp. Monday offered to buy rival fiber-optic components maker SDL Inc. for $41 billion in stock, an almost 50 percent premium over SDL's closing stock price on Friday.
The terms of the transaction call for JDS Uniphase (JDSU: Research, Estimates) to swap 3.8 of its shares for each SDL share. With JDS Uniphase stock closing at 116-3/16 Friday, the transaction values SDL (SDLI: Research, Estimates) shares at 441-1/2, nearly 50 percent above their closing price of 295-5/16 Friday.
If approved by shareholders and regulators, the merger would continue the dramatic consolidation of the optical networking industry that has been dominated by a string of acquisitions by Cisco Systems, Corning Inc., and JDS Uniphase. JDS Uniphase just completed the $15 billion acquisition of E-Tek, its largest competitor. Adding SDL to its stable would give the company an 80 percent market share for some types of optical networking components, said SG Cowen analyst Drew Peck.
Both JDS Uniphase and SDL have very rapid revenue growth rates and sky-high valuation ratios. They have benefited from the booming construction of fiber optic networks necessitated by the seemingly insatiable demand for more Internet bandwidth.
The telecom market research firm RHK Inc. in San Francisco estimates that the worldwide market for optical components used in long-distance telephone and cable television applications will grow to $23 billion by 2003 from $6.6 billion in 1999. The fastest growing segment of the market is Dense Wave Division Multiplexing (DWDM), which enables 128 light signals to be carried on a single optical fiber.
Optical networks use photons of light instead of electrical signals to transmit information. They have much greater capacity, reliability, and reach than electrical signals traveling over copper wire or coaxial cable. As an example, a standard twisted pair of copper wire can handle about 120 simultaneous telephone conversations. A modern optical network using DWDM can handle 1.6 million phone conversations.
JDS Uniphase stock gets hit
In Monday afternoon trading, JDS Uniphase stock dipped 15 to 101-3/16, a 13 percent loss, because of the rich price the company is offering for SDL and concerns about the company's ability to integrate two large acquisitions simultaneously. SDL, meanwhile, rose 23-13/16 to 319-1/8, an 8 percent gain, and about 65 points below the value of JDS Uniphase's offer.
One reason for the gap is that the acquisition offer does not provide a "collar" to protect SDL from dramatic swings in JDS Uniphase's stock price. In addition, analysts expect the transaction to encounter tough regulatory scrutiny because of the dominant market share the combined company would have for several types of optical components.
SDL focuses on pump lasers, which generate an optical signal, and amplifiers, which maintain the strength of that signal over long distances. Analysts said that the combined company would dominate certain segments of the laser pump business, which would raise antitrust regulators' eyebrows.
"The combined company would dominate the component business, especially 980 nanometer laser pumps, but expect close scrutiny from the government and customers," said SG Cowen analyst Jim Kedersha in a research note issued Monday morning. "There are lots of synergies, but lots of overlap as well. Regulatory review could take a while." A nanometer is one-billionth of a meter.
SDL's high valuation
Booming demand for optical networking components has enabled SDL to grow quickly. The company said in May that it expects its revenue to be at least 140 percent higher in 2000 than it was in 1999. SDL had sales of $72 million in the first quarter ended March 31.
However, JDS Uniphase is buying the company at the top of its range. SDL's current stock price is 11 times its 52-week low of 28-1/4. At its current market capitalization of $25 billion, SDL sells for more than 250 times what analysts expect it to earn for all of this year. Its trailing price-earnings ratio is an astronomical 568.
"JDS Uniphase is taking a highly valued currency - its stock - and buying a great property with it," said money manager Michael Holland, chairman of Holland & Company in New York.
While the boards of both companies have approved the transaction, it still requires approval from shareholders and regulators. The companies expect to close the transaction in December, and said in a conference call Monday that it will add to earnings at that time. SDL would have to pay JDS Uniphase $1 billion if it decides to abandon the merger plan and become part of another company, giving new meaning to the phrase "breaking up is hard to do."
Scifres to become co-chairman
If regulators and shareholders approve the takeover, San Jose, Calif.-based SDL will become a wholly owned subsidiary of JDS, which is based in San Jose and Nepean, Ontario.  SDL chairman Don Scifres will become co-chairman of the combined company.
JDS Uniphase was created just a year ago by the merger of Uniphase Corp. and JDS Fitel Inc. JDS Uniphase has carried out a number of acquisitions recently, most notably the $15 billion purchase of E-Tek Dynamics Inc., which it completed at the end of last month.
In a conference call, JDS Co-Chairman Jozef Straus emphasized that the deal will allow the combined company to address capacity constraints. [458K WAV or 458K AIF]
"The Internet is taking over the work," Straus said. "Customers need higher levels of integration and complex products. By relocating resources we can produce more products that are in short supply."
Each company is expected to produce sales and income higher than analyst expectations, said JDS chief financial officer Anthony Muller.
SDL has about 1,700 employees and generated revenue of $72 million in the first quarter ended March 31. JDS Uniphase, which makes transmitters, amplifiers, couplers, filters and switches for fiber optic networks, has around 17,000 employees and generated sales of $395 million in its fiscal third quarter ended March 31. Excluding merger-related charges and amortization of intangible assets, JDS Uniphase earned $85.8 million, or 11 cents per share, in the period. 
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JDS Uniphase
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