Tech Titans JDS, SDL Agree to Merge

SAN FRANCISCO, California -- In the largest high-tech deal ever, optical-network leader JDS Uniphase said Monday that it agreed to acquire optical-component supplier SDL Inc. for $41 billion in stock. If completed, the buyout would create a technology titan on the strength of the fast-growing market for high-speed networks that send data on light impulses over hair-thin glass fibers.

But investors punished JDS shares amid concern that the proposed acquisition f the latest in a takeover frenzy by the San Jose, California-based company f might be challenged by antitrust authorities, and that JDS was paying too much. The company's offer of 3.8 shares for each SDL share was worth $441.52 a share when it was announced early Monday, nearly 50 percent above SDL's closing price of $295.31 on Friday.

JDS shares fell nearly 13 percent, or $15.06, Monday, to $101.13 in NASDAQ trading, reducing the size of the deal to $35.6 billion by the day's end. SDL shares jumped almost 9 percent, or $25.38, to $320.69.

Analysts called the price understandable, given the super-heated market for equipment that can manage vast streams of Internet data and telephone and television signals. SDL, which produces semiconductors, lasers and amplifiers to boost signal strengths on optical networks, also was rumored to have been an acquisition target by Corning Inc., a JDS competitor.

"You've got to put that premium in perspective f both companies are extremely profitable and fast growing,'' said Todd Koffman, an analyst with the investment firm Raymond James and Associates in St. Petersburg, Florida.

JDS reported sales of $395 million in the quarter ending March 31, up fivefold from a year ago, while operating profits hit $128.7 million, a fourfold increase from a year earlier. SDL, also based in San Jose, saw its first-quarter sales double to $72.2 million, as profits surged sevenfold over the past year to $14.2 million.

Any combination that can help meet the seemingly insatiable demand for "high-bandwidth" networks which form the backbone of modern communications systems likely will succeed dramatically, analysts agreed.

"The market is so strong right now and there is so much demand for optical components" that even a $41 billion acquisition might be absorbed without a hit to JDS' bottom line, said Charles Willhoit, an analyst with the investment bank JP Morgan in San Francisco.

Willhoit cautioned that investors may logically wonder, "Is JDS biting off more than it can chew?"

The company just completed June 30 a $20 billion acquisition of E-Tek Dynamics, another optical supplier, its fourth in the past six months.

But Willhoit added: "JDS Uniphase is a company with a very deep management team. If anyone can pull it off they can."

That's assuming the deal passes muster with antitrust officials, who are charged with regulating a rapidly transforming sector in which the chief competitors have overlapping product lines that often make them each other's largest customers.

JDS builds a wide range of optical components, including semiconductors, lasers and modulators, which regulate the flow of light-based data streams, while both selling to and competing with telecom behemoths Lucent Technologies and Nortel Networks. But because each of those companies consumes much of its own equipment, JDS is the largest seller of optical parts.

The acquisition of SDL would extend that lead substantially by giving the combined companies a nearly complete line of components to run optical networks.

Even if the deal receives approval, the smooth integration of SDL represents JDS' largest challenge to date. It immediately follows the departure of JDS' longtime chief executive and architect of its rapid growth strategy. Kevin Kalkhoven, regarded as an industry visionary, left the company in May and was succeeded by Jozef Straus, co-founder of JDS Fitel, which merged with Uniphase Corp. last year.