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Can JDS Uniphase Buy Black Ink?

By Olga Kharif One of techdom's high fliers during the dot-com days of the late 90s, JDS Uniphase has spent the past several years searching mightily for greener pastures. Revenues in its bread-and-butter optical components business have dropped 80% since 2001, as the telecommunications industry confronted overcapacity.

So JDS (JDSU) is diversifying at the speed of light. On May 24, it acquired, for $760 million in cash and stock, an outfit called Acterna, which manufactures gear used in testing communications networks. That purchase comes on the heels of its Apr. 29 acquisition of Lightwave Electronics, which makes lasers for use in biotech and semiconductor fabrication. And last August, with a smaller acquisition, JDS expanded its presence in components for HDTVs.

JDS has dabbled in all of these product areas before. But all three combos expand its product portfolio and customer base.

WELCOME ADDITIONS. These purchases -- and with more likely to come in the next 12 months -- promise to change the company's image from that of an optical components company to a jack of all trades. Which is a good thing, most analysts believe. "Their current markets are just dead in the water," says Susan Eustis, president of consultancy WinterGreen Research. "So they need to look for something else."

Essentially, JDS is emulating its rival Agilent (A), which, despite declining sales, has been posting profits by diversifying its product mix. Agilent now makes everything from semiconductors to optical components to testing equipment. If one aspect of the business has faltered, its other product lines have been there to keep Agilent afloat.

JDS could sure use that kind of buoyancy. It posted losses of $38.6 million on $166.3 million in revenues in the third quarter of 2005, which ended on Mar. 31 -- way more than the $7.3 million it lost on $161.4 million in sales in the year-ago period. It's also burning through $21.6 million in cash a quarter.

BIG BOOST. The purchase of highly profitable Acterna alone should lift gross margins from the high teens into 35%-or-so range, figures Ari Bensinger, an analyst with rating service Standard & Poor's. Perhaps more important, it could significantly hasten JDS's long-awaited return to profitability. Before the Acterna deal, most who follow the stock figured JDS couldn't scramble back into the black until well into next fiscal year. Now, profitability by the end of calendar 2005 is looking like a real possibility.

The acquisition could also buoy JDS's slumping shares. Acterna lifts the combined outfit's annual sales to more than $1 billion -- music to Wall Street's ears. While Acterna is No. 2 to Agilent in the $2.64 billion global communications test and measurement field, the overall market should grow 11% this year, according to WinterGreen. No wonder JDS stock rallied, rising 6% on May 24, to $1.64.

That said, it's crucial that JDS treat acquisitions like Acterna as diversification, not as part of a cosmetic makeover. Many trace JDS's woes to poor performance, rather than market conditions. The overall optical components market grew nearly 20% last year, and it is projected to grow 10% in 2005, according to telecom consultancy RHK.

SHRUNKEN MARGINS. Even in such a fast-growing market, JDS's sales declined 6% in 2004. And its market share in optical components fell from nearly 30% in 2001 to 14% today. RHK analyst Daryl Inniss says it has been unable to compete effectively in the high-growth segments of its market.

Moreover, after years under water and supposedly cutting costs, margins have fallen from slightly more than 20% to the high teens over the past year. "They could have done more progress with their cost-cutting," says Bensinger, of S&P.

JDS is just now getting around to drastic restructuring measures. It recently announced another 1,350 layoffs -- although the total workforce, currently 5,600 people, could actually grow as Acterna's 1,770 employees are added. It's still in the process of divesting and selling its North American facilities as it moves its manufacturing to lower-cost China. Integrating acquisitions while undergoing a massive restructuring can be both tricky and risky.

FINGERS CROSSED. Those who know its history realize that the JDS of today is really an amalgam of a dozen acquisitions over the years. "We have a very strong integration team and very strong integration processes, which we have already been using," says Enzo Signore, the outfit's director of corporate marketing. And even after its latest acquisition, JDS believes it will have a cushion of about $900 million in cash and equivalents.

Perhaps JDS will continue to find growth in acquisitions. But right now, it doesn't have much choice but to hope that the strategy works. Kharif is a BusinessWeek Online reporter based in Portland, Ore.

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