Analysts and those from across the photonics landscape were digesting news of MKS Instruments’ $6 billion bid to acquire Coherent early last week — a move that itself countered a $5.7 billion deal that Lumentum in January struck to acquire Coherent — as optical components and semiconductor materials manufacturer II-VI released its second quarter fiscal year 2021 financial earnings. II-VI, on Tuesday, Feb. 9, reported record quarterly revenue of more than $785 million. The company also announced record cash from operations of more than $220 million, and record free cash flow of more than $175 million.
Three days later, on Friday, Feb. 12, II-VI issued its own bid to acquire Coherent. The company’s offer, worth approximately $6.4 billion, represents a 24% premium over the implied value of the Lumentum transaction, and a 9.8% premium over the implied value of MKS’ acquisition proposal.
The addition of a third suitor intensifies the bidding war. It also adds a new dynamic: Whereas MKS, much like Coherent, occupies a leading position in the manufacture of ultrafast lasers and laser systems, II-VI, like Lumentum, develops and manufactures optical components, including for telecom and datacom applications, and optoelectronics.
Mark Miller, senior analyst with the Benchmark Group covering Coherent, MKS, and II-VI, told Photonics Media that as three companies attempt to acquire one, the anticipated synergies of the three prospective deals are playing a role of increased significance as the bidding war unfolds. II-VI and Lumentum are direct competitors, as are MKS and Coherent. The extent of product and market overlap, Miller reiterated, remains vital to the ability to clear regulatory approvals and antitrust issues around the world, particularly in China.
II-VI and Lumentum both indicated last week that they believe their offers avoid duplication in products and markets that the two said the MKS offer is unable to avoid.
That duplication in laser markets, however, may be an advantage to MKS, Miller said, despite the fact that competitors Lumentum and II-VI would be unlikely to face the same degree of regulatory issues: “With MKS, I have talked about the overlap in picosecond and nanosecond lasers, but because they are more in the business, it would probably be easier for them to integrate. They might get more synergies.”
Based on the current offers, MKS said it anticipates achieving synergies of $180 million within three years of closing its deal. Lumentum in January said it expected to deliver more than $150 million in annual run-rate synergies within two years. II-VI said it anticipates achieving $200 million in annual run-rate synergies within three years.
Analysts including Miller have said that they would not be surprised to see any of the three bidders opt to increase or enhance their current offers.
Lumentum, in a separate statement issued Thursday, Feb. 11, said it believes the MKS proposal “faces significant regulatory hurdles and significant closing risk to Coherent and its stockholders.”
Lumentum said that it has agreed in China to divest all of its overlapping products, addressing concerns that could be raised by any antitrust regulator with respect to the merger contemplated by its merger agreement, and effectively eliminating all antitrust-related closing risk.
Strong Cash Flows
Looking exclusively at the balance sheets of the bidding companies, Miller said that while all three companies have found success making and completing deals to acquire and integrate leading companies in the last five years, Lumentum remains in the best position to make the mammoth Coherent buy.
“All three firms have been highly acquisitive,” Miller told Photonics Media. “In the last couple years Lumentum bought Oclaro, MKS bought ESI, and then II-VI bought Finisar.
“One difference, though, is the balance sheets. Right now, Lumentum is in the best position; they have net cash, the other two have net debt from their acquisitions. But the others are generating good cash flows. II-VI had over $220 million cash flow last quarter and MKS generated $147 million in the December quarter. This is a $600 million to $700 million acquisition — they can handle it.”
Geographic Expansion
In a announcing its quarterly results last week, II-VI CEO Vincent “Chuck” Mattera said that the company is well ahead of its plan to achieve its three-year, $150 million total synergy target from the Finisar acquisition.
“Our run-rate synergies already exceed $100 million as a result of our integration work over the past 15 months,” Mattera said. “We are now on track to achieve our $150 million total synergy target in 24 months, 12 months ahead of schedule, and we are now increasing our three-year total synergy target to $200 million. This work is contributing to our strengthening margins and strong cash flow.”
In a potential Coherent purchase, Miller said II-VI could be eyeing growth in a specific geographic market.
“I think II-VI in particular wants more footprint in Korea,” Miller told Photonics Media. “Everybody is looking to try to grow, and Coherent is coming up on a cyclical upturn. It is highly diversified — new markets, new areas — and would make them stronger in certain areas like Korea.”
Coherent’s quarterly revenue in the Asia-Pacific market would deliver that increased presence; the company reported generating revenue of $184 million in that market for the quarter ending Jan. 2, higher than in any quarter since that ending March 30, 2019. In four of its last five quarters, Coherent’s Asia-Pacific revenue has more than doubled that from any other geographic region. That growth stems from Coherent’s presence in annealing within microelectronics businesses, and in particular the manufacture of equipment used to make OLED and micro-LED devices, as well as semiconductors, Miller said. Medical labs and R&D centers reopening also contribute to that projected resurgence for Coherent.
Industry Impact
With the number of eligible potential buyers tripling last week, Miller said that in addition to the possibility of the existing involved companies enhancing their offers, it is not out of the question that a fourth company will submit a purchase offer. That possibility may not be a probability.
“The only one I can think of is IPG, but they like to stick to fiber lasers,” Miller said. “There might also be some telecom companies out there that might be seeing the same thing that Lumentum and II-VI are seeing.”
What is certain is the rareness of the situation — even as mergers and acquisitions are on the rise.
“I’ve never had anything like this, where I cover three firms and it’s three firms trying to buy one,” Miller said. “I’ve never seen it in 21 years.”
All three bidders, Miller said, are mindful looking to add scale, new geographies, and business diversification to their firms. "They know that Coherent is set for a cyclical upswing,” he said.
“The industry has really dried up," Miller added. "Rofin-Sinar is gone and Newport is gone, companies I used to cover. At least in the laser space there are a couple of other ones out there, but they are all gobbling each other up.”
Coherent continues to mull an industry-impacting decision. According to Miller, each buyer is presenting a compelling and strategic offer.
“The highest offer is from II-VI, moneywise, around $260 per share. They might have to think twice about MKS — that would be the easiest acquisition in terms of integration. And then Lumentum’s got net cash, while II-VI and MKS have net debt positions. Also there is over a $200 million breakup fee, if Coherent walks away from the Lumentum offer.”