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Lumentum: Cloistered Management Method

October, 2019

 

In the early 1980s, the concept of “Management By Walking/Wandering Around” or MBWA reached the height of its acceptance as an effective means of remaining bonded with lower-level managers as well as with other workers, and it had the added benefit of addressing significant problems beneath the surface before they got out of hand. It was practiced by Greg Dougherty as CEO of “Oclaro,” who would often just go to various offices unannounced, and such actions undeniably helped to bring the optics company back from the brink of bankruptcy, including not getting blindsided by unexpected market shifts. Conversely, according to our intelligence, Lumentum Holdings’ Alan Lowe, the CEO, is highly dependent on receiving the bulk of his input from a very tight, inner circle of top-level executives (although we were alarmed to hear that he does not tend to be receptive to communication of bad news).

Once again, there was so much rigidity that Lumentum thought it could get away indefinitely without even a formal CFO. Of course, such a stance was ironic because while it likes to present itself as an R&D-driven entity, like II-VI, it is really a holding company, which is more focused on acquiring and divesting assets. So certainly, obtaining the best financial advice is unmistakably imperative to such a business.

There was also apparently no room for the ex-Oclaro CEO, Greg Dougherty, as a request to be on the board at Lumentum failed to materialize (although he would have definitely accepted as he wanted to be in that role). In fibeReality’s opinion, it is hardly a stretch to conclude that Lowe is insecure enough to avoid saying out loud that his company could not afford to pass up on such an exceptional executive. (In fairness, we understand that even Finisar’s ex-CEO, Jerry Rawls, not only was uninterested in merging with Oclaro towards the end of his tenure, but he refused to consider engaging with Dougherty about a purchase, even during the times when Oclaro was struggling – thus, we are starting to reluctantly come to the conclusion that ego played a part with Rawls as well.)

Actually, it was probably a blessing in disguise that Dougherty never joined the Lumentum board. He surely would have found the top leadership’s style to be frustrating.

Its focus appears to be on just staying a quarter ahead of the competition mainly on the basis of risk avoidance, cost-cutting (sometimes on the fly as apparently is happening in the DCO space), and marketing rhetoric. We would argue that there has to be a sustainable game plan in place to result in a greater likelihood of long-term growth as well as for a potentially considerable increase in the value of the supplier.

Another problem is that given the restrictive corporate structure at the highest level, it is very difficult to achieve an elevated confidence level relatively quickly with the key folks obtained through an acquisition, such as Oclaro. Perhaps there would not have been as much of an evident surprise with the ACO market remaining strong, particularly in generating a lot of cash.

In establishing a truly solid relationship with the ex-Oclaro executives, it is possible that the snap decision to obtain an additional $40 million of cost synergies may have been prevented. After some reflection, we think they probably deserve to be given an ample opportunity with the necessary funding in a relatively short time window to ultimately execute/deliver on the 400-gig CFP2-DCOs, because of the potentially impressive upside, regardless of both the situation with Acacia Communications and the near-term budget numbers.

In contrast, over four year ago, Dougherty decided to bet the firm on ACO. He was also willing to take the heat if the opportunity had turned out otherwise. Naturally, his stance was not a secret at the firm.

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As always, fibeReality does not recommend any securities, and this writer does not invest in any companies being analyzed by us.

[written by Mark Lutkowitz]

 

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