Optical Components Vendor Consolidation Well Underway

Implications: 1) The new Finisar create the world’s largest supplier of optical module and subsystem solutions for the communications industry. 2) The merger makes sense with little product overlap and potential for revenue synergies in shared system customer base. 3) What impact to the rest? the merger would trigger significant consolidation within the optical components, modules and subsystem space. 

Analysis:

Consolidation in the optical components industry has lead to several deals since last year such as JDSU/Picolight, Oplink/OCP, Luminent/Fiberxon, Emcore/Intel Module Div etc. But no one is so influential and impressive until the recent news of Finisar/Optium merger, which creates the world's largest supplier of optical components, modules and subsystems for the communications industry — overtaking the current #1 player, JDSU.

The driver behind the deal was to create the complete portfolio against the rest vendors in such high-growth areas like SFP, SFP+, XFP, 10G 300-pin, tunable 40G (client) 300-pin, 40G (line) 300-pin, tunable ROADM, FTTx, CATV and Network Testers. It is worthwhile to mention there exists little product overlap between two companies (like XFP) and big potential for revenue synergies in shared system customer base. Finisar sells primarily into datacom (enterprise and storage) markets, while Optium's main customers are in telecom with some percentage in CATV.

The merger has been obviously seen attractive to investors, a relief welcome in general to the telecom industry. Traditionally, component suppliers delivers spectacular levels of value proposition and innovation, and its optical components are the backbone upon which next-gen networks are built. But unfortunately, such vendors are still hard to turn this value into profits. The sheer number of vendors has created a cut-throat environment where vendors are forced to compete on price - sometimes cutting their own throats in the process. Consolidation such like this would lead to reduce duplicative R&D and especially restores vendor pricing power. So it is generally believed that this news represents the first step towards a healthier industry.

Thus many analysts think one big merger could create domino effect, then who will be the next for perfect partners? Others among top 10 vendors are JDSU, Sumitomo/Excelight, Avago, Opnext, Emcore, Avanex, Bookham, Oplink and MRV (Source Photonics), and there still significant number startups in this space. Source Photonics is busy with going public, while Oplink, Emcore, JDSU could focus on absorbing recent acquisitions, possibly not to contemplate any more at this time. How about the remaining companies?