Industry Talk Has Corning-SDL Deal in the Works - TheStreet

The glass looks more than half-full when it comes to

Corning

(GLW) - Get Report

-- and we're not talking Pyrex.

Monday, the maker of optical fiber for the telecommunications industry projected that second-quarter earnings would handily beat Wall Street's estimates. Corning shares jumped 9.2% on the forecast, hitting a 52-week high and igniting a rally across the optical-components sector even as the

Nasdaq

slid some 3%.

Now the company, which has spent some $7 billion in the last year and a half to push to the forefront of the optical-fiber business, appears ready to make another big splash. Industry observers expect Corning to acquire optical-parts rival

SDL

(SDLI)

as it seeks to keep pace with leader

JDS Uniphase

(JDSU)

, which has also been on a buying spree.

Corning's head of optical operations, Wendell Weeks, wouldn't comment on acquisition rumors but added, "You can count on us to continue to do deals." For his part, SDL Chairman and CEO Donald Scifres said, "I just can't comment on anything," when asked about talks with Corning.

'So Fast'

SDL makes network components such as laser pumps and specialized optical amplifiers that help shoot light down optical fibers. Analysts say these are precisely the types of products Corning needs. Indeed, with SDL, Corning would catapult ever closer to its stated goal of providing networking companies a complete set of optical products that can generate and carry light pulses end to end.

Glass Houses
Corning stock trading at 113 times earnings

Source: BigCharts

"Things are consolidating so fast in this industry, I'd be surprised if this deal wasn't done in the next three to six months," says a person close to the two companies who asked not to be identified.

"SDL would give them immediate critical mass in several important segments," says Conrad Liefur, a

U.S. Bancorp Piper Jaffray

analyst who doesn't follow Corning but has a strong buy on SDL. Piper Jaffray has no banking ties to either company.

Looking Glass

And with two top optical-component makers, JDS Uniphase and

E-Tek Dynamics

(ETEK)

, preparing to close their $15 billion merger, Corning must be looking for allies.

Corning and SDL "now are looking at all possible alternatives to become big suppliers," says

J.P. Morgan

analyst Charles Willhoit, who has a buy on both stocks and is boosting his Corning price target to 300 from 250. Morgan co-led a recent Corning offering.

After selling off its glassware division in 1997, Corning has been richly rewarded for focusing on the booming global fiber-optic business. Customers simply cannot get enough of Corning's products, and investors can't get enough of the stock, which has nearly doubled this year. Proof of the bursting demand came Monday, with Corning's stellar profit forecast. SDL shares rose nearly 5% Monday to close at 261 63/64.

"The scream for bandwidth has become so intense in the telecom industry, all of the leading players have had to integrate more extensively than they ever have before," says

Harvard Business School

technology visionary Clayton Christensen.

Buying Spree

Corning hasn't been stingy with its richly valued stock.

Already the nation's leading manufacturer of fiber-optic cable, Corning has been adding to its optical portfolio, last month acquiring device-maker

NetOptix

for $2 billion and last year setting a $1.8 billion deal for laser pump maker

Oak Industries

.

Corning has taken the acquisition path well traveled by others in the networking sector.

Cisco

(CSCO) - Get Report

, for example, expects to make more than 20 acquisitions this year.

Lucent's

(LU)

buying spree continues, most recently

netting optical-device maker

Chromatis

.

Sycamore

(SCMR)

has also followed suit, unveiling last week a $2.9 billion

pledge for "metro" device maker

Sirocco

. Even SDL is buying: Last week it paid $2.2 billion for

Photonic Integration Research.

"At this phase in an industry's history, when a product isn't yet good enough, you have to be integrated," says Christensen. The thinking, says Christensen, is that "you have to do everything in order to do anything."

Corning's Weeks says the push for consolidation is the industry's way of answering customers' requests. "System suppliers want less and less suppliers; companies that can do a lot more and integrate across the space are more valuable to them," says Weeks.

Morgan's Willhoit adds: "They are looking to be the one-stop arms merchant to the optical world."