In the past, we would have thought at least twice about Finisar buying Oclaro, given the less than stellar experience the former had earlier in acquiring more of a telecom-centric entity. Of course, Jerry Rawls was still in effect running the firm as Chairman of the Board. The dynamics have changed dramatically now with Rawls’ retirement announcement. After putting his heart and soul into the company, he will want to leave it in good hands. The most important advantage in a potential merger with Oclaro is that Finisar would automatically get a top-notch CEO, Greg Dougherty, who has been battle-tested to say the least, and shares some of the same characteristics as Rawls, a low-key, practical leader. There would be other benefits as well, including Finisar saving face, if it were to choose to pull back from the consumer-centric, 3D-sensing market.
Given the unique and stringent challenges in running a large optical components firm, which frequently go unrecognized, Finisar could not find a better candidate. Dougherty obviously brought Oclaro back from the brink of extinction. He also had experience as COO at the former JDSU.
With such a combination, it would clearly take a major competitor out of the arena. In fact, it would almost assuredly be the most powerful combo to go against Lumentum, with a leadership that tends to be favored by the Street, but has demonstrated some questionable judgement lately, whether it has been about irritating a potentially large customer, probably being too headstrong in going after the 3D-sensor opportunities, and dabbling in moving up the food chain. Regarding NeoPhotonics, although this writer at ECOC 2017 asked the firm to make its best case on its future, it is hard not to conclude that it may be permanently in a weakened state.
Clearly, Finisar would gain from Oclaro’s strong position in the ACO space as well as become a truly dominant force in the QSFP28 arena. It would get a firm, which has been preparing for an exit for a while, such as in offering an attractive balance sheet. Of course, Oclaro would be a big beneficiary as well. Besides the limited amount of growth it may achieve independently at higher capacities, the argument that it is still in the relatively early stages of benefiting from its current product lines is not terribly convincing to us.
We have said in the past that if Oclaro were to ever become a part of Finisar, the former would be very instructive about the pitfalls of being in the consumer marketplace. Yet, we suspect that Rawls is already picking up more of the drawbacks himself as he seemed to be really thrown by the long delay required by Apple because of what he apparently perceived to be a rather insignificant change in the production process. He also has even more of an appreciation for structuring such a business now, which requires a scaling effort tremendously far in excess of his company’s experience, and having to pull it off with the additional tech challenges of six-inch wafers.
With the full realization by Rawls that major leaps in growth of sales and margins of his traditional product lines only occurs on rare occasions, such as the recent pent-up demand in China or the unexpected impact of the Internet during the big bubble days, he would undoubtedly prefer not to be burdened with a vastly new challenge of making unhappy choices over whether to internally or externally produce those larger VCSEL dies, neither of which would make it substantially more attractive. Finisar is in relatively good shape from the time Rawls took over as CEO again, and it is time to hand the reins over to somebody else to take these decisions on VCSELs, or perhaps even more likely look to pull out of that game. The timing could wind up being excellent for Oclaro.
[written by Mark Lutkowitz]