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Technical Insight

Laser fab deal stands despite share crash (Headline News)

Nortel dropped a bombshell on the financial markets on February 15 when it cut its forecast for growth in revenue and earnings in half, saying the economic downturn in the United States will continue well into the fourth quarter. The news was shocking primarily because Nortel had assured investors in December that its outlook remained bright despite the turmoil in the telecommunications industry at large. These reassurances were then repeated in January. The company was expected to report $8.1 billion in revenue and 16 cents per share in earnings. It now looks like Nortel will struggle to achieve $6 billion in revenue and will post a loss of 4 cents per share. Possibly no one was more surprised than the top executives at JDS Uniphase. Just 9 days earlier JDSU had agreed to sell their 980 nm pump laser fab in Zurich, Switzerland to Nortel, in order to secure the approval of the US government for JDSU s merger with SDL (see Compound Semiconductor March 2001, p5). The deal closed one week later, and JDSU received $2.5 billion in Nortel stock, which was then trading at $30. Most analysts expected JDSU to quickly liquidate the shares in order to add to JDSU s cash reserves. However, the Nortel announcement, issued just two days later, sparked a massive sell-off in Nortel shares that dropped to $20, shaving $800 million off the value of JDSU s holdings. Nortel shares have subsequently dropped to $15, further damaging JDSU s position. Nortel is currently threatened by at least a dozen class action lawsuits, all revolving around Nortel s statements in December and January. Naturally, there was rampant speculation that JDSU would enter the fray as well. Several companies were rumored to be interested in buying the Zurich plant. When Nortel was announced as the winning bidder, JDSU s chief financial officer indicated that there were two major reasons behind the decision. First, Nortel is JDSU s largest customer, and the deal seemed like an excellent way to further cement their relationship; and second, "Nortel was willing to pay a fair price for Zurich." However, that price has now been cut in half, and it is difficult to imagine that Nortel executives did not know about their company s rapidly deteriorating outlook when they were negotiating the purchase price. Nevertheless, JDSU have indicated that they do not plan to sue, despite the fact that their proceeds from the sale have, in effect, been cut in half. JDSU s CFO was recently quoted as saying "Of course we re talking to lawyers, but it s not easy to sue your largest customer." So it seems likely that the deal will stand. Analysts now expect JDSU to hold on to their Nortel shares for longer than expected, in the hope that their price will rebound.
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