Can you feel the ground moving beneath your feet? Shares of Oclaro Inc (NASDAQ:OCLR) jumped nearly 28% today, following the news that the optical components maker has signed a definitive agreement with telecoms firm Lumentum Holdings (NASDAQ:LITE), whereby Lumentum will acquire all of the outstanding common stock of Oclaro for approximately $1.8 billion in equity value, or $9.99 per OCLR share. This implies a 27% premium to Friday’s closing price.
William Blair analyst Dmitry Netis commented, “The long-awaited consolidation of the optical industry landscape has arrived via less competition, price erosion, and inefficiencies in research and development, G&A, and sales spending. It should also serve as a wake-up trigger to others in the industry—mainly Finisar and IIVI, which have the capabilities and balance sheets to spark a potential bidding war (low probability at this point though) or takeout proceedings for the remaining players (Applied Optoelectronics, Acacia, Inphi, and Neophotonics in the public domain, as well as Luxtera, Source Photonics among the privates). Less obvious consolidators that could resume their optical M&A ambitions include Molex (backed by Koch Industries), Intel, and Corning.
“Together, the two companies have the strongest photonics chip design team in the world—across high-speed optical ICs for 400G and beyond. There are significant cost synergies from an R&D standpoint— DFB/EML lasers and high-speed modulators likely to see most overlap—and COGS (e.g., fab and contract manufacturing consolidation). Industrial (e.g., fiber lasers), 3-D sensing (VCSELs, EEL), datacom, and telecom transport applications are most complementary on both ends of the deal, strongly diversifying the combined company revenue mix and giving the company an important first-mover advantage into these growing markets,” the analyst continued.
Oclaro certainly had the Street divided. Based on 12 analysts polled by TipRanks (in the last 3 months), 4 rate OCLR a Buy, 7 issue a Hold, while only one recommends selling the stock. The 12-month average price target stands at $8.19, marking a nearly 18% downside from where the stock is currently trading.