Tuesday, June 23, 2009

The Newport-Oclaro swap--Tipping the scales, a return to bartering

Ever since the announcement that Newport will give its diode business and $3 million in cash to Oclaro in exchange for its New Focus operation, opinions have been all over the map: from Newport is crazy to give up its internal diode business, to Newport got the better deal. The bottom line? I think it will tip the scales against the least competitive players.

Here’s how it works. Newport’s laser group, Spectra-Physics, got its diode business in 1992 when it acquired OptoPower, located in Tucson, Arizona. For years there was an industry-held view that the diode-pumped laser makers needed to control the diode pump technology so vital to the solid-state lasers. Today, the big laser companies like Coherent, TRUMPF, Rofin-Sinar, and IPG Photonics all pretty much make all their own diodes.

Fabs, though, are very expensive operations, costing as much as $30 million or more per year, depending on what you're counting. A classic way to make that work is to get volume through the fab--increase the capacity utilization. But with well over a dozen competitors and a slow market, that's hard to do, and everyone knows it. Spectra's diode operation has certainly seen better days, now that its assembly operations have moved to China and sales are soft for everyone.

Meanwhile, Bookham (now Oclaro) has two gold-plated fabs, a GaAs fab in Zurich and an InP fab in Caswell, UK. By shutting down the Spectra diode fab in Tucson and making the diodes in its own fab, Bookham can get much better returns out of its capital. The new volume could even be low margin chips, as long as it helps keep the lights on. Moreover, even Bookham's competitors regard Bookham's R&D highly. And Oclaro is hoping that it can be *the* independent diode supplier to the solid-state laser makers.

It all sounds good, but competitors are quick to take pot shots at the deal.

For its part, Coherent is keen on keeping its diode manufacturing in-house, in part because it also makes its OPSL gain chips in its fab with its high power diodes. Thus, while Spectra's fab may no longer be as integral to its overall laser business, Coherent's fab is. And the other big laser companies (Trumpf, Rofin, and IPG) are all quite religious about controlling the supply of key components and keeping their fabs in-house.

Others suggested that Newport gets a solid business from New Focus (albeit one that is reportedly losing money at the moment), while Bookham-Oclaro could very easily fumble the diode business it's taking over.

This is all true, although I would add that at least it plays to a larger strategy for Oclaro. Oclaro shows that it has a plan for its diode business. That's better than no plan.

One thing that everyone agrees on is that the New Focus operation fits better with Newport, even though it's reported to be losing money. And it’s something of a completed circle for New Focus, since one of the founders (in 1990) was Milton Chang, already then a former CEO of Newport.

As for the remaining competitors, one less high-power diode fab has to be viewed as a good thing. Of course, Bookham/Oclaro aims to get most of the benefit from that, which is to say that it makes it all the harder for the least competitive suppliers—it tips the scales against them.

Finally, you have to wonder what this says about the state of the industry when a major deal amounts to a barter, with almost no cash or stock involved. Of course, all deals are swaps of some kind, but bartering is considered the most primitive form of trade--a pre-monetary transaction that happens in primitive societies and war zones. The value of the diode laser business is evidently so low that a monetary or stock transaction these days is out of the question, and perhaps only a trade of this kind can go forward.

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