Update: JDS Uniphase to Buy SDL for $41 Billion in Largest Tech Merger

The massive deal represents a 49.5% premium for SDL shareholders.
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Updated from 7:30 a.m. EDT

JDS Uniphase

(JDSU)

, the world's largest maker of fiber optics components, will buy

SDL

(SDLI)

in a stock deal valued at close to $41 billion, the companies said Monday.

Under the terms of the deal, the largest technology acquisition ever outside of telephony, each SDL share will be exchanged for 3.8 shares of JDS Uniphase stock. Based on Friday's closing prices, the arrangement represents a 49.5% premium for SDL shareholders. JDS closed last week at 116 3/16, up 2 3/36, while SDL was up 10 7/8 at 295 5/16.

Predictably, JDS Uniphase stock plummeted, while SDL was up. JDS Uniphase closed down 15 1/16, or 13%, at 101 1/8. SDL finished up 25 3/8, or 9%, at 320 11/16 after reaching a 52-week high of 330 15/16.

"From SDL's standpoint, it's wonderful for shareholders," said Terry O'Brien, an analyst at

Branch Cabell & Co.

in Richmond, Va. who covers JDS Uniphase.

Highflier Buys Higherflier
JDS Uniphase vs. SDL, one year

The merger will speed up the development of high-capacity, flexible optical networks that will allow quicker transmission of data over the Internet, the companies said in statement. The deal gives JDS Uniphase access to SDL's technology, particularly its raman amplifiers, which allow laser signals to travel a greater distance over fiber optic networks. JDS Uniphase has been a big buyer of the devices.

In addition, the deal will increase JDS Uniphase's manufacturing capacity, which lately has not been able to keep up with demand, O'Brien said.

"I think it is particularly good for SDL, because JDS has been growing at such a fast pace that it has dwarfed SDL, which has no financial capacity to grow fast enough to compete with JDS," he said, noting that as of Friday's closing prices, the market valued SDL at $22.5 billion, while JDS Uniphase's market capitalization was $86.8 billion.

JDS has acquired 17 companies since 1995, including, most recently,

E-Tek Dynamics

, which it bought for $20.4 billion last month.

However, JDS may be growing too big, too fast. "In my mind, it certainly raises antitrust concerns because of the size of the deal," O'Brien said. O'Brien has a long-term buy on JDS Uniphase stock, and has a 12-month price target of 140. His firm has not performed underwriting for the company.

Another analyst, James Waggoner, the director of research at

Sands Brothers & Co.

, had similar concerns. "They are going to look at it very closely," he said of regulators, although eventually he believes the

Department of Justice

will approve the deal. Waggoner has a strong buy on JDS Uniphase and a buy rating on SDL. His firm, too, has not performed underwriting for either company.

In a conference call, company officials assured analysts that the deal will pass regulatory muster. And since JDS recently worked with the Justice Department to get its E-Tek deal through, analysts are confident company management can be successful at convincing regulators, Waggoner said.

Analysts were slightly surprised by the price tag, but noted that the deal -- as opposed to R&D deals that take years to pay dividends -- is expected to pay off immediately for JDS Uniphase's bottom line. However, the high price was the result of a bidding war for the company, which included

Corning

(GLW) - Get Report

, Waggoner said. "Clearly, the company held an auction," he said.

In the analyst conference call Monday, the company indicated that quarterly earnings for JDS Uniphase, E-Tek and SDL will all beat Wall Street analysts' estimates.

The deal, which is expected to close in December, is the largest U.S. high-tech acquisition, and among the top 20 largest M&A deals of all time, according to

Thomson Financial Securities Data

.

San Jose, Calif.-based SDL, which counted JDS Uniphase as one of its largest customers, has about 1,700 employees and had sales of $72 million in the first quarter, ended March 31. JDS Uniphase, based in Nepean, Ontario, has more than 17,000 employees and reported sales of $395 million in its fiscal third quarter, ended March 31.

JDS Uniphase was advised by

Banc of America Securities

and

CIBC World Markets

. SDL was advised by

Thomas Weisel Partners

.