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Thursday, July 27, 2006

Are M&A Guys Calling On Finisar?

Stocks: (FNSR)(JDSU)

Everyone wants to believe that the business of building optical components for network equipment vendors is a good business. The theory is that Finisar and JDS Uniphase will power the rising market in additional network capacity for telecom companies. But, there are more than a few companies playing in the optical equipment maker field. And, Finisar does not have the balance sheet that companies like JDSU do.

The company has had some encouraging news recently. It won a large patent suit against DirecTV and aside from a settlement, Finisar will get $1.60 for each TV set-top that DirecTV deploys.

Finisar also had a decent quarter for the period ending April 30. The company announced results on June 7. Revenue for the quarter hit $102 million up from $75 million a year earlier. And, the company had an operating profit of $5 million. The company's cash and short term investment increase about $2 million from the immediately previous quarter.

Wall St. thought the numbers were lackluster, and drove the stock down 24% the day after earnings came out. The company had a heady run over the 52-week period, starting below $1 and moving up to $5.49 this May. So, results had to be spectacular to keep the run going.

Investors have begun to bet that the future for the company is dimming. The short position in the company rose 55% for the period posted in mid-July moving to 27.3 million shares. Finisar trades 14 million shares a day, so the coverage ratio is not bad, but the increase is a sign of eroding confidence that a company as small as this can make its way in a very competitive market.

Finisar would be an excellent fit with JDS Uniphase.(Short interest in JDSU dropped 7.6 million shares to 83.2 million in July.) It has to have occurred to both companies. They are, essentially, in the same business and both struggling. The amount of overhead that could be taken out in a consolidation would likely increase the cash flow from the Finisar operations well above the $2 million it was able to produce last quarter. The company does hav a large convertible preferred instrument that would have to be taken care of in a transaction, but the quants at any first-tier investment bank can work that through.

If someone tells you that bankers and the managements at JDS Uniphase and Finisar have not give all this a great deal of thought...

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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