While it is quite possible that there have been recent discussions between Finisar and Oclaro about a merger, Greg Dougherty seems to be taking the opportunity at investment conferences to have kind of virtual mini-interviews with Finisar for the top-level position. If nothing else, Dougherty is making an effort to anticipate and alleviate any concerns by Jerry Rawls, while reinforcing the advantages of a marriage between the two corporations. Given that we advocated that Finisar look to exit during the aberration of the China boom, as it might never have a better opportunity again, now we believe that it could be risky to its competitive position to potentially allow Lumentum to purchase Oclaro. Conversely, Rawls may be betting that the latter would only hook up with the former as a last resort because Doughtery would likely not become the CEO of that new entity, and that Finisar’s place in the market would actually be enhanced as the strengths of Oclaro could be at least somewhat neutralized by Lumentum’s leadership, who in our opinion, has demonstrated a knack for poor decision-making lately.
At the MKM Entertainment, Travel and Technology Conference last month, Dougherty said: The “thought process” of combining “strong companies together” more like the chip industry has been “missing” from the optical space and “it is a shame.” He also talked about greater scale, a broader product portfolio (including R&D capability), and enhanced silicon capability resulting in a “long-term winner,” which would create a more powerful combination in “dictating [pricing] terms.”
Dougherty also mentioned that he could work “another 10 years” apparently attempting to be persuasive that he would stay on long after any transaction. It was also interesting that he addressed his philosophy: “The last question you discuss is who the CEO and who the CFO is,” which we interpret as striving to convince the rather unflashy Rawls that it is not about a power trip for him.
Dougherty reiterated some of these same points at the Raymond James Technology Investors Conference this month. There is no question in our minds that both the cultural fit and the product breadth would be substantially more compelling with a Finisar-Oclaro merger than a Lumentum-Oclaro one.
Moreover, although Finisar purchased a fab to build six-inch wafers for 3D-sensing, on its last quarterly earnings call, Rawls was not exactly enthusiastic about the definite chances for great success in this new area. His evolving views in more of a negative direction, again, may help open the door to Dougherty, who is very much aware of the drawbacks of the consumer optics business, and who could conceivably either sell the fab or at least partially convert it for other purposes.
Finisar has some time before Rawls retires, and it may be able to wait a while before committing to a merger with Oclaro, if that is the actual intention. By that time, the price for Oclaro could be considerably lower, and we would not be surprised to see Lumentum’s valuation continue to drop, perhaps even preventing it from making a credible counteroffer.
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[written by Mark Lutkowitz]