The proposed $100 billion merger between Corning and Canadian network provider Nortel Networks would create a fiber optics company with a market cap of $170 billion. Analysts say that this is just one of a series of upcoming mergers and acquisitions that will transform and consolidate the lucrative fiber optics industry. 
The European high-tech investor must be aware of two recurring scenarios in consolidating industries. On the one hand, small- to mid-size companies developing fiber optic technology are certain to be takeover targets and will therefore skyrocket in value while the acquiring companies’ share prices will suffer for perceived overpayment. On the other hand, regulators are watching the sector’s mergers like hawks, to ensure that buyouts don’t create an anti-competitive climate.
However, though regulators sometimes slow things down, they won’t stop the consolidation.
The Consolidating Fiber Optics Industry
“It has to consolidate,” said John Nicholls, CEO of Scotland’s Photonic Materials to Tornado-Investor.com. “Most of these companies are seen as a base to grow the business into some sort of merger with a larger strategic partner which manufactures crystals and other components used in the construction of fiber- optic networks.”
European fiber companies like Photonic, as well as publicly traded firms such as Bookham Technologies, France’s HighWave Optical Technologies, and even to a certain extent Marconi Communications are well positioned to take advantage of the attention. Each makes parts of the fiber optics food chain that is highly valuable to larger international network companies, and each knows it. “There’s such a demand for capacity, and in terms of our company, we’re strategically important,” said Photonic’s Nicholls.
Telecommunications consulting firm RHK has reported more than 20 fiber-related mergers this year, compared to three last year, and that even before the JDS Uniphase takeover of SDL for $41 billion, the average price per acquisition as of June was already seven times that of 1999. Venture capital investment in the sector is five times 1999 levels.
The Initial Stage
The initial stage of the consolidation sees relatively smaller players forging value-adding strategic relationships to carry out specific aspects of the manufacturing process. This week, British Telecommunications announced that it had cut a $3.04 billion deal with Marconi to provide optical network gear. Earlier this month, Marconi announced a deal with Bookham to supply multi-channel DWDM optical components for Marconi’s networking products.
Where are the Best Investments?
Does this mean that fiber optic companies in Europe are particularly positioned technologically or strategically to make them more attractive those in the US? Yes and no.
“If you look at the technology from a market adoption perspective, or in terms of technological development, with the number of wireless equipment and major handset manufacturers, then Europe is ahead of the US,” said Krishna Visvanathan, communications team investment manager for 3I, which has had investments in many European fiber optics companies, including Bookham and Photonic Materials. “But in terms of sheer numbers of optical networking companies, the US is significantly ahead.
“It’s interesting that some specific geography does have more photonics technology than others” Visvanathan said. “The US is hot, and there’s lots of start ups, but there are a fair few in the UK as well. But overall, the geography doesn’t have a major impact. The entire optics network market space is so hot that any company, European, Israeli or American, has fantastic exit prospects, assuming the technology is sound.”
Indeed, the major headlines aside, important deals continue to take place outside Europe: Altitun, a tunable laser company with good technology, but scant revenues, was bought in May by ADC Telecommunications, Inc (ADCT) for $872 million, and Israeli-founded US company Chromatis Networks was bought in June by Lucent Technologies for $4.5 billion in Lucent shares.
But, the European consolidation is keeping apace. “Given today’s climate, we’ll definitely be a takeover target,” said Photonic’s Nicholls. “I’m not building a business to sell it,” he said, but then readily agreed that with so much money being offered by companies increasingly desperate for his products, his position could be far worse.