MKS, in a press release Monday, said its proposed deal is worth approximately $300 million more than that offered by Lumentum ($6 billion versus $5.7 billion). In a letter to Coherent board members dated Feb. 4, MKS said it was delivering its offer after 12 months of discussion with Coherent, regarding a combination aligning the technology offerings of the two companies to create a “global leader in lasers and photonics.”
Analysts, including those speaking exclusively with Photonics Media, said that Coherent’s decision will largely boil down to the core business differences between the prospective buyers, outweighing any impact from the timing of the MKS offer — timing that Mark Miller, senior analyst with the Benchmark group, acknowledged was surprising, given the evolution of the Lumentum transaction.
In a Jan. 19 call with Coherent CEO Andy Mattes and again in a statement from company President and CEO Alan Lowe on Monday, Lumentum pointed to the complementary nature of its company in a combination with Coherent. For MKS and Coherent, both companies’ manufacture of laser and laser systems highlights the existing product synergies between the two.
Adding to that duplication are the common markets that MKS and Coherent serve, Miller told Photonics Media.
“There is certainly a lot of overlap just in lasers,” Miller said. “Especially with the Newport brand, there is some overlap in industrial/manufacturing, OEM customers, and now again in scientific instrumentation, starting to come back after the virus.”
Both firms additionally market picosecond and femtosecond lasers used in research and biomedical applications. The two companies occupy common ground in the life and health sciences, industrial technologies, and test and measurement sectors.
Gaining Regulatory Approval
The avenue to forging a leading industry player in those markets may, however, be somewhat incumbered, Miller said.
“There is one thing, and it is pretty significant: If you look at Coherent’s deal to buy Excel Technology in 2006, the German Federal Cartel Office stepped in and prevented that from going through. There was small overlap there. There is a lot more with MKS.”
Miller said that the German Federal Cartel Office intervened even after U.S. antitrust officials approved the acquisition. He expects regulators to take a long look into the MKS deal should Coherent opt to proceed with MKS.
Lumentum is sticking to the issue of regulatory approvals (specifically, avoiding problems arising from them) as it insists that its existing offer delivers more upside to Coherent, a potentially combined company, and the customers that such a company would serve across markets and around the globe.
In a Lumentum company update issued by Needham & Co., senior analyst Alex Henderson said Lumentum believes its offer is less likely to face regulatory approval issues; that offer shows less overlap in the business sectors in which the two companies currently occupy prominent positions. Lowe, on the Jan. 19 call with Mattes and other Lumentum executives, added that he does not foresee delays in earning approval in China. Lumentum and Coherent serve as market suppliers in that country.
Lumentum also contends that the values of its shares have more value than those of MKS, Henderson said in the report.
Both Miller and Henderson said they would not be surprised to see Lumentum forced to enhance its current offer to stay in pursuit of Coherent.
“We think [it is] likely Lumentum will use a mixture of cash and stock as sweetener if they go down that path,” Henderson said in the company update dated Monday, Feb. 8. “We think a 50/50 split is likely. We also think they could do this and still have the deal be accretive within 12 months.”
Competition Continues
Henderson, in the report, pointed out that Lumentum has a strong acquisition record; the company increased the synergy estimates three times on its deal to acquire optical components producer Oclaro in 2018 before successfully completing the transaction. Oclaro’s product line — optical components and modules for the long-haul, metro, and data center markets — are among those Lumentum has indicated its Coherent acquisition would complement.
For MKS, Miller said, the company has shown its ability to grow organically, as well as through acquisitions (inorganically). Miller referenced the company’s Newport acquisition five years ago, which included the Ophir brand and Spectra-Physics. The lasers for micromachining, bioimaging, and scientific research applications that Spectra-Physics develops, as well as Spectra-Physics’ CW and fiber lasers, directly compete with Coherent’s line of ultrafast lasers.
At present, the offers from Lumentum and MKS are structurally similar, containing a combination of cash and stock from the purchasing companies. MKS said its offer represents a 16% premium over the implied value of the Lumentum transaction. Additional details of the two offers are available on Photonics Media’s website, with continuing coverage.