JDS Uniphase (JDSU) Acquires SDL—What a Difference 7 Months Makes! What started out as the biggest..

JDS Uniphase (JDSU) Acquires SDL—What a Difference 7 Months
Makes!

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 What started out as the biggest technology merger in
history saw its value plummet in line with the declining stock market, a
weakening economy, and concerns about the cash-flow impact of actions the
acquirer would have to take to gain regulatory approval. The challenge facing
JDSU was to get Department of Justice approval of a merger that some feared
would result in a supplier (i.e., JDS Uniphase/SDL) that could exercise
enormous pricing power over the entire range of products from raw components to
packaged products purchased by equipment manufacturers. The resulting
regulatory review lengthened the period between the signing of the merger
agreement by the two companies and the actual closing to 7 months.

Through an incredible series of 11 mergers and acquisitions,
JDSU assembled the largest portfolio of optical components in the industry.
JDSU manufactures and distributes fiberoptic components and modules to
telecommunication and cable systems providers worldwide. The company is the
dominant supplier in its market for fiber-optic components. JDSU’s strategy is
to package entire systems into a single integrated unit, thereby reducing the
number of vendors that fiber network firms must deal with when purchasing
systems that produce the light that is transmitted over fiber (Hanks, November
2, 2000). SDL’s products, including pump lasers, support the transmission of
data, voice, video, and Internet information over fiber-optic networks by
expanding their fiber-optic communications networks much more quickly and
efficiently than would be possible using conventional electronic and optical
technologies. Consequently, SDL fit the JDSU strategy perfectly. As of July 10,
2000, JDSU had a market value of $74 billion. Annual 2000 revenues amounted to
$1.43 billion. The firm had $800 million in cash and virtually no long-term
debt. With its price-to-earnings (excluding merger-related charges) ratio at a
meteoric 440, the firm sought to use stock to acquire SDL, a strategy that it
had used successfully since 1999. Although few doubted the beneficial effects
of the merger on JDSU/SDL, regulators expressed concern that the combined
entities could control the market for a specific type of laser (i.e.,
980-nanometer wavelength pump lasers) used in a wide range of optical
equipment. SDL is one of the largest suppliers of this type of laser, and JDS
is one of the largest suppliers of the chips used to build them. Other
manufacturers of pump lasers, such as Nortel Networks, Lucent Technologies, and
Corning, complained to regulators that they would have to buy some of the chips
necessary to manufacture pump lasers from a supplier (i.e., JDSU), which in
combination with SDL also would be a competitor.

On February 6, 2001, JDSU agreed as part of a consent decree
to sell a Swiss subsidiary, which manufactures pump laser chips, to Nortel
Networks Corporation, a JDSU customer, to satisfy DoJ concerns about the
proposed merger. The divestiture of this operation set up an alternative
supplier of such chips, thereby alleviating concerns expressed by other
manufacturers of pump lasers that they would have to buy such components from a
competitor. Following receipt of shareholder approval on February 12, 2001, the
deal closed 2 days later. JDSU shares had fallen from their 12-month high of
$153.42 to $53.19. The deal that originally had been valued at $41 billion when
first announced more than 7 months earlier had fallen to $13.5 billion on the
day of closing, a staggering loss of more than two-thirds of its value.

Case Study Discussion Questions

 1. The JDS Uniphase/SDL merger proposal was somewhat
unusual in that it represented a vertical rather than horizontal merger. Why
does the FTC tend to focus primarily on horizontal rather than vertical mergers?

2. How can an extended regulatory approval process change
the value of a proposed acquisition to the acquiring company? Explain your
answer.

 3. Do you think that JDS Uniphase’s competitors had
legitimate concerns, or were they simply trying to use the antitrust regulatory
process to prevent the firm from gaining a competitive advantage? Explain your
answer.

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