$41 billion is simply not enough.
could easily have paid more for rival fiber-optic equipment maker
. A 50% premium over last Friday's closing stock price isn't that much, is it? After all, this merger would unite two of the most powerful players in one of the fastest-growing businesses on the planet.
Who's to say
billion isn't a fair price to pay for SDL? Why not
billion? Hey, JDS is only paying with stock -- no cash here -- so let's go all the way. Why not $90 billion, JDS' market cap before the deal was announced? Surely, the company's investment bankers could have devised a way for JDS to pay that much and still retain control of the merged entity.
You could argue that SDL is being grossly underpriced at $41 billion.
The business fundamentals of the two companies could hardly be better. SDL, based in San Jose, Calif., makes lasers to strengthen signals on telecommunications networks. JDS, also based in San Jose and in Nepean, Ontario, is the largest independent supplier of fiber-optic components to the communications equipment market. Together, they can dominate the world of gadgets that transmit and amplify optical signals.
Think bandwidth. Demand for the stuff they make is driven by the fantastic global demand for increased communications capacity as voice, data and video communications converge. That is a runaway train that analysts don't see slowing for years.
Think growth. The market is expected to grow 30% a year for years, according to Wall Street. SDL's sales rose 90% in the 12 months through March 31, and JDS boosted revenue 301% through acquisitions and internal growth, according to
. Earnings at SDL were up 127%, and at JDS, they rose 179%. Analysts expect long-term profit growth of 40% to 50% for these companies.
Think breadth of product line. Imagine the manufacturing and marketing cost savings that management can certainly achieve post-deal. Consider the critical mass of brainpower inside "JDS Uniphase/SDL" to drive R&D in an ever-changing market.
You Just Gotta Love These Guys!
There will be those skeptics who say that JDS is overpaying. Such people will note that JDS declined 13% on news of the announcement and closed near its lows.
The president of a New York-based investment management firm specializing in technology says, "$41 billion is a staggering amount of money to pay. It is like the dot-com deals of old. This is beyond all reasonable metrics."
The investment manager adds, "I don't own either company, but if I owned either, I would sell." (If he is so smart, how come he didn't own JDS and SDL years ago? He would have been up 200% last year instead of a mere 100%.)
There will be naysayers who complain that JDS and SDL are overvalued component manufacturers in a competitive business. They will argue that the fiber-optics component market is characterized by fast-changing technology and price erosion. They might say that the lasers, amplifiers, transmitters and other components may soon become commodity items like phone modems became some years ago. ("When I hear the word 'components,' it raises a red flag," says the investment manager.)
They may say that optics manufacturing is a new business and that there is no guarantee that JDS/SDL will have the best products in the future. Do not listen to them.
Others will carp that these companies have profit margins inferior to software companies. Be on the lookout for critics who note that JDS trades at about 60 times revenue, which
may never have achieved even in its monopolistic heyday. They are a menace to the success of a deal like this.
Finally, there will be financial historians like economist and author Peter L. Bernstein, who says:
The object of all investment is to end up with more money than you started with. If you are never going to see any cash from these companies in the form of dividends or stock buybacks, then you are making a bet that some day some other person will pay you more than you paid. That is the only way you will ever be able to recoup your cash investment.
All you can do is shake your head and wonder. Doesn't he get it? These are stocks that can't go down from here.