News

28 January 2009

 

Bookham and Avanex agree to merge

After years of speculation, optical component, module and subsystem makers Bookham Inc of San Jose, CA and Avanex Corp of Fremont, CA have agreed to merge in an all-stock transaction (subject to the approval of both firms’ shareholders).

Avanex shareholders will receive 5.426 shares of Bookham common stock for every share of Avanex common stock, valuing Avanex at $35.4m ($2.17 per share), a 67% premium over yesterday’s closing price of $1.30. Upon the transaction closing (expected within 3-6 months, when a new name will be adopted), Avanex shareholders will own about 46.75% of the combined firm and Bookham 53.25%. In the interim, both firms will continue to operate their businesses independently.

President & CEO of the combined firm will be Bookham’s president & CEO Alain Couder. He will be joined on the board of directors by three directors from Bookham’s board (Edward Collins, Lori Holland and Bernard Couillaud, who will be chairman), as well as Avanex's president & CEO Giovanni Barbarossa (who remains in a consulting capacity to assist with the merger) plus two directors from Avanex’s board (Greg Dougherty and Joel Smith). Other executives include Jim Haynes as chief operating officer COO; Jerry Turin as chief financial officer; Richard Smart and Adrian Meldrum as general managers of two Telecom business units; Yves Lemaitre as general manager of the Non-Telecom business unit; and Scott Parker as VP of sales.

Integration is expected to take 6-9 months. It is not expect that any manufacturing sites will be closed (although the merged firm will re-evaluate its assessment on a regular basis). Bookham has chip fabrication facilities in the UK and Switzerland (Zurich), as well as manufacturing sites in the USA and China. Avanex has facilities in Horseheads, NY; Shanghai, China; Villebon Sur Yvette, France; San Donato, Italy; and Bangkok, Thailand.

In addition to having solid, long-standing, strategic relationships with the top 15 optical OEMs, the new firm reckons that it will have one of the industry’s broadest portfolios of optical products for long-haul and metro, covering both the line (amplifiers, pumps and passives) and terminal (transmit, receive, transponders) areas, as well as having vertical integration from chips to components, transponders and subsystems.

Bookham brings primarily chip and component expertise and tunable products. Avanex primarily brings leadership in modules such as controlled amplifiers and integrated subsystems. There is overlap in optical amplifiers, subsystems and optical modulators so, over time, the aim is to rationalize the benefits and best parts of both organizations.

On the optical amplifiers side, the new firm will have access to internal pumps and passives as well as a broad customer base. On the transmit side, it reckons that it will have the internal technology and key differentiated technology required to grow transponder business and take advantage of the large addressable market at 10G and the growing market at 40G.

Key strengths of the new firm include:

• what is claimed to be best-in-class telecom chips based on indium phosphide, lithium niobate and gallium arsenide;

• being well positioned for 40Gb/s and reconfigurable networks;

• leveraging new opportunities quickly within an expanded customer base;

• the resources to enable leading R&D investment in key product lines (focusing spending rather than spreading it more thinly by pursuing the same opportunities as standalone firms);

• the ability to leverage a mixed-model manufacturing strategy of both in-house and outsourced capacity, with decisions based on how best to achieve flexibility, efficiency and the lowest cost to maximize gross margin (Bookham has previously shifted much manufacturing from San Jose to its plant in Shenzhen, China, while Avanex has outsourced its manufacturing, largely to subcontractor Fabrinet Co Ltd).

The firms reckon that the merger will take advantage of the merits of both business models. In-feed of components from Bookham into Avanex amplifiers and subsystems should improve gross margins and cost points, further improving vertical integration.

“The combination of Bookham and Avanex creates synergies that we expect will significantly improve financial performance faster than either of the two companies could accomplish on a stand-alone basis,” says Couder. “There is minimal product overlap between our businesses, allowing us to quickly expand sales opportunities and improve service to our customers. In addition, both companies have strong technology platforms and the best engineering teams that we expect will allow us to drive innovation and expansion for both existing and new growth areas,” he adds.

“The significant financial and technological advantages to combining the two companies will benefit our customers, employees, and shareholders,” says Barbarossa. “We expect that the combination of Avanex’s next-generation subsystem design and integration capabilities, enhanced with additional internal content from Bookham, will deliver end-to-end product offerings at competitive prices.”

The combined firm is expected to be adjusted EBITDA accretive (compared to the Bookham standalone results) in its first full quarter. Synergies such as a combined sales organization and single public company costs should generate $7m of quarterly cost savings by the end of the fourth full quarter ($28m annualized). Merger-related restructuring costs are expected to be less than $7m (mostly in the first year, with most work done in the first six months and costs to be covered by synergies over the same timescale). The new firm should have a stronger balance sheet, benefiting from combined cash balances and no outstanding debt.

In the year to September 2008, Bookham and Avanex respectively reported gross margins of 24% and 28%, SG&A (selling, general and administration) expenses of 17% and 18%, and non-GAAP operating margins of -5% and -2%. The target operating model for the combined firm is for gross margin of 31%, SG&A expenses of 12%, and non-GAAP operating margin of +7% for its fourth full quarter and 35%, 12% and +10%, respectively, long term.

Both firms separately have been reaching critical mass to invest competitively in each key product line, and it would have been difficult for either alone to maintain the required level. The intention for the merged firm is for R&D spending to ultimately be 13% of revenue (perhaps exceeding any other competitor, according to Couder), which is a level that is thought to be necessary to be a leader in the industry.

The new firm’s main competitor will be JDSU, while Finisar, Sumitomo, Opnext and Emcore will compete in selected market segments. Last August’s merger of Finisar and Optium created a direct competitor to JDSU, while Opnext’s acquisition of StrataLight (completed earlier this month) pushed Bookham and Avanex to fourth and fifth largest optical communications component firms (by revenue). This was despite Avanex previously Essex Corp’s Commercial Communication Products Division (CCPD) in 2007, and Bookham acquiring optical components businesses of Nortel Networks and Marconi in 2002, Ignis Optics Inc, Cierra Photonics Inc, New Focus Inc in 2004, and Onetta Inc and VCSEL maker Avalon Photonics in 2006. The combined firm will be back on a par with Opnext as third largest. In particular, while Bookham and Avanex separately have lacked scale, together they reckon they will represent arguably the largest player within the metro and long-haul sector.

See related items:

Bookham improves cash balance despite 25% revenue drop

Bookham’s business with Nortel to continue on ordinary terms

Opnext completes StrataLight acquisition

Avanex’s gross margin falls more than expected as revenue shrinks 13%

Avanex cutting 8% of workforce and closing Florida facility

Search: Bookham Avanex JDSU Finisar Sumitomo Opnext Emcore Optium

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