Oclaro, Opnext to merge

The optical components and subsystems space finally has seen the major merger observers have demanded. Oclaro Inc. (NASDAQ: OCLR) and Opnext Inc. (NASDAQ: OPXT) have agreed to merge in an all-stock, tax-free deal. Opnext shareholders will receive a fixed ratio of 0.42 shares of Oclaro common stock for every share of Opnext common stock. As a result, Oclaro shareholders will own 58% of the merged company.

Oclaro executives also will dominate the combined management structure. Oclaro Chairman and CEO Alain Couder will hold the same titles with the combined company, and Oclaro will own 6 of the 10 seats on the board of directors. Opnext Chairman and CEO Harry Bosco will hold one of Opnext’s seats.

The combined company will vault over JDSU into second place, behind Finisar, in the optical components and subsystems market, Bosco told analysts and press on a conference call this afternoon. The combined company will see positive non-GAAP operating income in the first full quarter after the close, Opnext and Oclaro executives said on the call. They also said they expect annualized cost reductions of $35 million to $45 million within 18 months of the close of the transaction, which the executives expect will occur in the next three to six months.

While Couder, Bosco, and other company participants declined to provide significant details of where those cost reductions will originate, Couder said that certain facilities would likely be downsized. Opnext’s production resources in Japan would seem to be a likely target, as Bosco said that he plans to move module production from those facilities. Couder did say that Oclaro’s fabs are seen as strategic assets that the combined company will retain.

Restructuring and system integration costs were pegged at $20 million to $30 million.

The merger would combine the number four (Oclaro) and five companies in optical components and subsystems based on Ovum’s market share estimation. “We have been looking at consolidating this industry for the past two years. And we have been looking at all kinds of combinations. I think in this industry everybody has been talking to everybody for the past two years,” Couder explained when asked about the timing of the agreement.

“It is very clear to us that the combination of Opnext and Oclaro is the most accretive combination that we could find. We are doing it now because we have been discussing [it] in depth and we have been convincing ourselves that the integration is doable,” Couder continued. “We did it successfully in the Bookham/Avanex [merger]; it is an integration of the same kind. And I think the industry is in a situation right now where such a merger can be a very important step toward a simpler industry.”

“I think the other thing is if you look at the market, it’s changing,” Bosco added. “We started out in a customization world about 12 years ago, 15 years ago. Then it went to a standardized module world. And now it’s going back into customization plus modules. So you’re going to be selling components as well as modules to customer bases, depending on the type of product.

“You’re also see announcements coming out of our customer base about buying technology companies,” Bosco continued (see, for example, “Cisco to acquire CMOS silicon photonics firm Lightwire”). “And they’re going to be looking for companies to partner with those technology companies to take their products forward, their customized products. We want to be that company that can address that.”

The transaction is subject to customary closing conditions, including approval by the shareholders of both companies and the receipt of regulatory approvals in the U.S.