Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Patience and persistence pays off -- or at least it has for industrial laser maker Coherent Inc., which is reaping the benefits of an acquisition it took years to get done.

This week marks the seven-month anniversary of Coherent's nearly $1 billion purchase of rival Rofin-Sinar Technologies Inc. For years, the transaction appeared to be a long shot. Coherent made a series of non-binding takeover offers in 2011, 2014 and 2015, according to filings, but only came to an agreement last March. Even after reaching that milestone, closing wasn't easy: the U.S. Securities and Exchange Commission questioned whether Rofin-Sinar's board had considered valuation analysis from resident activist shareholder SilverArrow Capital Advisors, which sought support for a takeout price within a range that was 4 percent to 28 percent above the price it had agreed upon with Coherent. (It helped that the next-closest bidder's offer was 14 percent below Coherent's.)

Even with the hurdles, and less than a year after closing, the deal has proven its worth: Coherent's market value has more than doubled to $6.3 billion since the transaction closed and the Santa Clara, California-based company is now trading within a stone's throw of its record high, thanks in part to better-than-expected sales in recent quarters as a result of its biggest acquisition to date. While it hasn't been the only driver of the recent gains, the acquisition has made Coherent a stronger company and better competitor. After analyzing the transaction, Gadfly can safely give it a "slam dunk."

Deal Scorecard
Coherent has thrived since its acquisition of Rofin-Sinar
Source: Bloomberg
*"Before" Market value and EV/Ebitda data from March 2016 when the deal was announced. Other figures as at the end of Coherent's 2016 year end, or Oct 1, as deal was not yet complete. ^"After" Market Value and EV/Ebitda figures as at June 2017. Consensus analyst estimates for FY2017 Ebitda, revenue and margins are used

Coherent's materials-processing unit -- which makes lasers that are used for melding, cutting and marking paper, plastic, textiles, glass and wood, among other things -- has benefited the most, with quarterly revenue rising more than twofold. And a targeted figure of $30 million of annualized cost savings from the deal remains achievable, if not beatable, which is good news.

We Got the Beat
Coherent's acquisition of Rofin-Sinar has helped the company exceed recent quarterly earnings projections
Source: Bloomberg

Moreover, its diversified and strengthened cash-flow position will allow Coherent to more rapidly pay down the roughly $700 million in debt it took on to fund the Rofin-Sinar transaction. 

Up, Up and Away
Coherent's acquisition of Rofin-Sinar has helped enable its shares to outperform those of its rivals
Source: Bloomberg

Aside from that part of the business, analysts and investors see growth potential for Coherent if organic light-emitting diode, or OLED panels are increasingly adopted for use in television, smartphones and tablets. This looks to be the case, with recent reports indicating that Apple Inc. has ordered 70 million such panels from rival Samsung Electronics Co. for its latest iPhone. Coherent, which makes lasers for such display panels, could see earnings growth through 2024 from the uptick, according to Stifel's Patrick Newton.

Screen Shift
OLEDs are expected to take a larger share of the smartphone market in coming years, in part because they provide a better viewing experience
Source: Display Supply Chain Consultants via Stifel

While Coherent integrates Rofin-Sinar and prepares to seize the opportunities associated with heightened OLED demand, investors shouldn't expect it to spend up on another large deal in the near term. But they should take comfort from knowing the company can flex those muscles again in the future, and that its dealmaking strategy so far has been, in a word, coherent. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. For 20/20 Hindsight, Gadfly studies past deals and grades them (from positive to negative) Slam Dunk, Polite Clap, Meh, Troubled or Cringeworthy. In assessing Coherent's Rofin-Sinar takeover, we took into account the significant increase in market share in laser sales for materials processing; the additional revenue (and profit) obtained as a result of the transaction, and the likelihood that the company can pay down debt at an accelerated pace. .

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net