JDS Uniphase strikes again: SDL acquisition in for heavy antitrust scrutiny

Keeping with the acquisition pace JDS Uniphase started about a year ago, the company moved last week to merge with one of its major competitors, SDL Ltd. On the heels of closing its merger with E-Tek Dynamics, the $15 billion E-Tek price tag seems minute compared with the $41 billion that JDS Uniphase agreed to pay for SDL.

Under terms of the agreement, JDS Uniphase will exchange 3.8 shares of its stock for each share of SDL, giving SDL a roughly 50% premium and about $441 for each share. In addition, the deal has no collar, which could prove problematic considering JDS Uniphase shares have dropped since the announcement of the merger, while SDL shares have escalated.

As a protective measure, JDS has made it painful for SDL to pull out of the merger in favor of another offer.

"JDS would receive a $1 billion breakup fee should that happen," said Jozef Straus, co-chairman and CEO of JDS Uniphase.

Although competitive offers could become an issue before the expected December closing, the deal is likely to encounter tight antitrust scrutiny from the Department of Justice. The December closing date is intended to give extra time for a DOJ inquiry, which was needed with the E-Tek merger, said Mike Phillips, general counsel and senior vice president of business development for JDS Uniphase.

"It is really too early to speculate how the regulatory authorities will respond at this point," Phillips said. "But we have worked successfully with them in the past, and we expect to this time as well."

Antitrust questions are likely to surface in areas such as production, competition in the market and what the scope of the combined companies' market share would be. Sources at JDS Uniphase and SDL both declined to comment on estimates of the combined market share.

The top concern is the 980 nanometer pump laser chip development, which both companies currently produce. JDS Uniphase purchased between $7 million and $8 million worth of pump modules from SDL, which is one of the likely drivers for the merger.

"At the chip level, there are a lot of other competitors in the market," said Don Scifres, SDL chairman, president and CEO. "All kinds of companies such as Alcatel, Lucent and Pirelli are out there. And more are appearing as we go forward, so I don't really have a great concern that it will be a problem." He also noted that Japanese vendors such as Fujitsu and Mitsubishi also compete in the space.

While "coopetition" has been a defining tactic used by JDS Uniphase and many others, the company is hoping the merger will ramp up production to meet increasing demands. With the SDL merger, JDS Uniphase can package the components in-house, which should be pivotal in streamlining costs and production time.

"The idea is to re-allocate our resources so we can produce more products in short supply," Straus said. And as the metropolitan and access markets begin to heat up even more, that will be critical, he added.

The two companies have bottlenecks in different areas of their manufacturing processes, so the combination should expedite the production process, Scifres said.

Currently, competitors such as Lucent Technologies and Nortel Networks package their own pumps, as does Corning since its acquisition of Lasertron.

"JDS was one of the few without internal [packaging] capabilities," said John Lively, senior analyst of optical components at RHK. "The 980 [nanometer] pump lasers made by SDL are a critical and large part of the cost of the amplifiers JDS is making."

And while JDS Uniphase and SDL both admit manufacturing constraints, the problem is not isolated, Lively said. "Not any one supplier is suffering from tight supply."

While supply woes are plaguing component companies, integration is also a concern. And considering the number of acquisitions JDS Uniphase has made in the last year (see figure), that task will be no small feat.

As if the integration of companies wasn't enough, the components themselves are in need of deeper integration.

"[Vendors] have to move away from one function, one device," Lively said, noting that SDL is heading in that direction, making it a wise choice for JDS Uniphase.