JDS Uniphase Shifts Gears

Some analysts wonder whether the big Acterna deal is such a swell idea, though.
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Investors cheered plan B at

JDS Uniphase

(JDSU)

, but some analysts see more trouble ahead.

Just a month after announcing it would fire 700 employees and move most of its manufacturing to China, the optical component maker embarked on an entirely new course:

communications network monitoring. JDS jumped into the field Monday with a pact to buy closely held

Acterna

for $760 million in cash and stock.

Acterna, which emerged from bankruptcy protection in October 2003, makes the testing and measurement equipment used by telcos to monitor network performance. Not only is this well off the map for the optical parts industry, but there is little if any overlap between that business and the one JDS has been in. Acterna has more than 250 phone and cable company customers, but that group is entirely separate from the 30 or more telecom equipment makers that JDS supplies.

JDS calls the move a way to strengthen its business model, double its market opportunity and quicken its return to profit. But critics simply call it desperate.

"One thing really stood out to me, and that's the synergies; there aren't any," says J.P. Morgan Chase analyst Ehud Gelblum, who rates JDS sell.

JDS executives told analysts on a conference call Monday that once the companies were combined, as much as $20 million in costs could be trimmed over 12 months. And every little bit helps when costs and operating expenses were $816.2 million last year.

JDS also emphasized the deal could open the door to an adjacent market.

"Revenue synergies are hard to measure, but our customer groups are complementary," JDS marketing chief Dave Gudmundson said in an interview Tuesday.

Obviously, acquiring a company with $450 million in annual revenue and a 50% gross margin has immediate financial benefits. But a prettier top line doesn't adequately address some of the bigger issues at JDS, say analysts.

"If there's no real good synergies, then this acquisition does nothing to fix the gross margin problem at JDSU's core business, and nothing to make JDSU profitable either," says J.P. Morgan Chase's Gelblum.

JDS may be cursed with having too much cash, says CreditSights, an independent research shop in New York, referring to the $1.4 billion that the company has at its disposal.

"We believe this deal has a lot to do with JDSU having the luxury of a large cash hoard, which could be the worst reason to make an acquisition," wrote CreditSights analyst Ping Zhao.

But JDS says restructuring is under way at its core business -- designing and making optical components for networking customers -- and the decision to broaden its reach into new markets is a better use of cash than adding more optical gearmaking companies to the fold.

"We are on a track for success" in the optical parts business, says JDS's Gudmundson. "To acquire something ugly, a boat anchor, isn't core to our strategy."

JDS shares rose 7 cents to $1.62 Tuesday afternoon after upgrades by analysts at Needham and Smith Barney.

And while Gelblum agrees it is wise for JDS to diversify and avoid the bumps in the telecom industry, adding a business as divergent as Acterna isn't the best fit.

"Even if Acterna is a great company," says Gelblum, "it's basically going to be a separate company bolted on to JDSU."