Will Two Optical Wrongs Make a Right?

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Shares of optical networking component maker Opnext (NAS: OPXT) jumped nearly 50% overnight thanks to a freshly announced stock-swap merger with rival Oclaro (NAS: OCLR) . If consummated, the deal combines two of the most troubled companies in the optical networking industry: As of last night, both stocks had lost about 58% of their value in the previous 12 months.

Opnext CEO Harry Bosco says the merger will give the combined company the "critical mass" needed to win in the laser diode market. Furthermore, the combination creates a leader in the ultra-fast optical transceiver segment behind Finisar (NAS: FNSR) but ahead of JDS Uniphase (NAS: JDSU) .

Opnext shareholders will end up owning about 42% of the new entity. The board will also split 60/40 in Oclaro's favor. Those ratios are roughly in line with the pre-merger companies' sales: Oclaro's trailing revenue stands at $417 million against Opnext's $327 million, so 56% of the sales come from Oclaro today.


At $745 million altogether, the total company would still be smaller than Finisar or JDSU. The company does put some space between itself and Infinera (NAS: INFN) , though. Right now, Infinera and Oclaro run neck-and-neck in revenue volume.

And of course, there will be cost-saving synergies. Expect a heavy dose of layoffs once the merger closes. Given that both Oclaro and Opnext sport negative operating profit and EBITDA margins, the move is understandable.

Does this deal signal the start of massive consolidation in the optical industry? I wouldn't be surprised. In this sector, a handful of large elephants are dancing with lots and lots of little mice. The flooding in Thailand last year hit this industry hard, and it may simply be cheaper and easier to build new companies out of the remains of badly damaged old ones. And let me point out that Finisar and JDSU sit on respectable piles of cash with little debt, making for easy all-cash buyouts as the opportunities come along.

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At the time this article was published Fool contributor Anders Bylund holds no position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Infinera. Motley Fool newsletter services have recommended buying shares of Infinera and writing naked calls on JDS Uniphase. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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