Slumping Optics Firm Searching for Merger Partner By CARLOS MARTINEZ Staff Reporter After layoffs, cutbacks and a huge drop in revenue last year, Optical Communication Products is seeking a merger partner to rebuild its business. Having moved its headquarters from Chatsworth to a smaller location in Woodland Hills last month, the company plans to sell its building and continue to cut costs while seeking a potential merger partner. “That whole optics sector has been decimated and hit bottom so there’s nowhere else to go for a lot of companies,” said Dave Kang, an analyst with Roth Capital Partners. After going from $144 million in revenue in 2001 to just $37 million last year, the company has been hit hard in recent years by a free-falling tech market. Despite its acquisitions of two laser technology firms in the past year to help rebuild its bottom line, the company has continued to lose ground, posting a $4.3 million loss or $0.02 per share during the quarter ending June 30, on $9.5 million in sales. That compares to a $1.7 million loss or $0.0 per share on $9.8 million in sales a year earlier. Susie Nemeti, company CFO, said the company would not comment other than confirm the firm is working with Bear Stearns & Co. to evaluate strategic alternatives such as a possible merger or sale. While OCP may be looking for a merger partner to rebuild its business, Kang said he believes the company could still survive without merging with another company. “If it were another company I might say something else, but I believe OCP is in a pretty good cash position to survive this market,” Kang said, referring to the company’s $66.8 million in cash it has on hand. But much of that depends on whether the optics sector will rebound in the next several months. So far, Kang said, the sector has shown no definitive trend other than some sporadic movement in the wireless market primarily from large telecom firms making small equipment purchases. A maker of optical components for the telecom sector, the company had been one of the Valley’s fastest growing technology companies as it took advantage of a burgeoning communications market in the late 1990s and into 2001. The growth of cell phones, the Internet and fiber optics from telecom firms building broadband connections in many cities helped fuel the company’s growth. Starting in 1998, the company’s revenue growth began with $19.6 million, followed by $36 million in 1999, $101.6 million in 2000 and $144 million in 2001. Fruitful relationship Thanks primarily to its relationship with Tokyo-based Furukawa Electric Co. Ltd. which owns a 58.1 percent stake in the firm, OCP has been able to bundle Furukawa products with its own and produce cost-effective components and optics equipment for a variety of telecommunications firms like Alcatel, Nortel Networks, Cisco Systems, Lucent Technologies and others. “They’ve benefited a lot from this relationship and made them particularly efficient in distributing its bundled products,” Kang said. But like many tech firms, the company saw its market nearly dry up as broadband development slowed along with the cell phone and wireless sectors which also slumped. Jonathan Kramer, president of Kramer.firm, a technology consulting company based in Santa Monica, said few optical component firms have adjusted well to a down economy. “There are a lot fewer of them than there were two years ago, but if OCP can hang on, it should bet better sooner rather than later,” he said. While telecoms have stopped building networks and acquiring equipment in great numbers due to an overall surplus of equipment already acquired, Kramer said there are already signs that the telecoms are again in the market for equipment. “Verizon is out there buying some equipment and so is Nortel and it’s not much, but it’s a start,” said Kramer, who is already anticipating a jump in equipment sales by early next year. In the meantime, OCP may well be sold or merge with another company given its cash position and its history of providing equipment to large telecom firms, Kang said. “There’s a chance it could merge or be sold, but I would bet against it,” he said. “It’s a pretty efficient company that made cuts when it had to and thanks to its relationship with Furukawa is able to provide low-cost equipment.” The company’s acquisition of Cielo Communications last October and that of Gore Photonics in February, should help improve its position in the optical market. “The importance of those acquisitions is the VCSEL (Vertical Cavity Surface Emitting Lasers) laser which is the latest type of laser and is much cheaper than traditional lasers,” Kang said. But for those acquisitions to pay off, the market must start opening up, Kang warned. “But I believe the worst is behind them and if they can hang on, they’ll be back.”
