The broadband equipment vendor ADC placed a billion-dollar bet on its optical components business. Now that same business is up for sale. John Devaney asks why.
A house move and an economic downturn are both good times to reconsider what is important to you. A move across town, where the van can shuttle back and forth, barely gives pause for thought, with the contents of one house mostly transferred to another. But the further the move, the greater the expense, and suddenly those fraying bath towels or that Steely Dan vinyl collection don't seem quite so important.
A slump in the telecom market appears to have a similar effect on priorities. When the order books dry up, the big manufacturers implement a hiring freeze, stop middle management flying business class and cancel a few R&D projects. Further down the line, as the sales drought shows no sign of ending, the least productive units get sold off or shut down. Lay-offs follow.
A sign of how desperate the telecom downturn is can be seen in the number of optical components businesses now on the open market. ADC, Nortel and Agere are three of the more prominent telecom vendors looking to offload their components divisions. The question is: will there be any takers?
"I think the chances of a sale are pretty good," countered Rick Masloski, vice-president and general manager of ADC Photonics. "We've been talking to a number of companies, but if it [my division] hasn't sold by 31 October, it goes into shutdown mode. ADC retains the intellectual property and auctions off the assets."
When FibreSystems Europe talked to Masloski last year (April 2001 p55), he was upbeat and looking for 40-100% annual growth. A few months earlier, ADC had spent more than $900 m (€920 m) on the acquisitions of Altitun (a Swedish tunable-laser company) and Ibsen (a Danish firm that makes phase masks and integrated-optical devices). ADC's venture-capital division had also invested in various early-stage components start-ups. But despite the momentum, Masloski had reservations - even back then. "If you ask me what keeps me up at night, it's the stability of the global economy," he explained at the time.
Of course, not only did the global economy start to wobble, but the fortunes of established and alternative telecom carriers went into freefall (see "The great telecom crash: where did it all go wrong?"). At the bottom of the supply chain, optical components vendors felt the trickle-down effects of the carriers' capex cuts soon enough. The pain was made worse by the stockpiles of components that systems builders had accrued when times were good.
So would ADC have done anything differently? "I don't think we would," said Masloski. "I think our downfall was in the market condition - how fast and how deep it eroded. I don't think anybody expected what we have seen, and I don't think it's over."
ADC's decision to get out of the optical components business cannot have been taken lightly, though. Altitun cost ADC $870 m - and that's not factoring in the tens of millions of dollars that must have been invested to bring its tunable-laser technology out of the development lab and into production.
A similar process of investment and integration went on at Ibsen before it became the first part of ADC Photonics to be axed. But Dirk Jessen, Ibsen's vice-president of sales and marketing, is keen to emphasize that there are no hard feelings: "Two years as ADC Denmark was extremely beneficial," he explained. "We grew the company and the organizational structures, and we learned a lot about manufacturing."
When ADC decided that it could no longer support its Danish venture, Ibsen's management raised the funds to buy back the company and make continued investment in new products. Where ADC's cash and patience ran out, Ibsen carried on and launched the D-MON, a diffraction-grating-based monitor for measurement of channel power in dense wavelength-division multiplexing systems (see "Ibsen gratings boost network monitors"). It's also developing phase masks for writing gratings in indium phosphide.
Yet the rejuvenated Ibsen cannot afford to develop new technology alone. "We are actively pursuing partnerships for product opportunities," said Jessen. "When you are a small company today, you have to be open to working with other people. We're very open."
Back to the big picture. One large telecom equipment maker shedding its optical components division would be a big story. But with the likes of Agere and Nortel also looking to exit the optoelectronics business, the effect is nothing short of seismic. "There's a significant shift to the Far East," said Roy Rubenstein, a senior analyst with US consultancy RHK. "The Japanese players are steadfast to this marketplace, as are China and Korea. JDS Uniphase wants to move its manufacturing to Shenzhen in China, [while] Corning has a packaging venture in Korea."
Rubenstein thinks the big players have been surviving from quarter to quarter, until they simply couldn't go on any longer. That's a view echoed by Masloski: "Our projection is that recovery is a year or two out, and the cash strain to keep going until then was too much for ADC to try and absorb."
• This article originally appeared in FibreSystems Europe September 2002 p17