Lumentum and Coherent logos

On 19 January 2021, two leading U.S.-based photonics companies—the San Jose, CA-based Lumentum, and Coherent Inc., headquartered in nearby Santa Clara, CA—announced a merger agreement under which Lumentum would acquire Coherent for cash and stock valued at US$5.7 billion. The deal value represented a beefy 49% premium over Coherent’s closing price on Friday, 15 January.

The transaction—which, subject to shareholder approval at both companies, should close in the second half of calendar 2021—will result in a global photonics company of uncommon scope. [Update: on 8 February, Coherent received an unsolicited competing bid from another would-be buyer, MKS Instruments.]

Lumentum, which booked US$1.68 billion in revenues in the fiscal year ended June 2020, has established strong businesses in particularly in optical networking, telecom and data communications, an addressable market that the company estimates at some US$7.9 billion, and in diode lasers and other products for 3D sensing and lidar, a market that it pegs at US$0.9 billion. Acquiring Coherent will add penetration in an estimated additional market of some US$10.6 billion involving lasers for microelectronics, precision manufacturing, instrumentation, aerospace and defense, according to a presentation by the companies.

Integrating complementary markets and R&D

At the deal’s unveiling, Alan Lowe, Lumentum’s president and CEO, characterized the combination as “an important advancement of Lumentum’s strategy,” and one that would enable the combined companies to drive forward R&D and pursue growth opportunities “at a time when global markets are increasingly relying on photonics products and technologies.” Coherent’s president and CEO, Andy Mattes, added that the combination of the two “iconic brands” in photonics would bring together complementary product lines and customer bases, and enable Coherent’s businesses to grow faster in a number of areas, particularly in several niche markets in the defense and automotive sectors.

In a joint press release accompanying the announcement, the two companies underscored some “compelling strategic and financial benefits” they envisioned for the transaction. In particular, beyond combining “complementary leadership positions” and substantially expanding the two firms’ addressable markets, the companies believe that the combination will better enable them to plug into a variety of “megatrend” value chains.

These value chains, the companies suggested, range from science and R&D to advanced/precision manufacturing to a broad spectrum of end-user applications. And Lumentum and Coherent believe these activities are positioned to grow rapidly, as photonic technologies become increasingly central to a broad swath of business and personal activities, during what Coherent CEO Matte characterized as “the decade of photonics.”

The combination could also, according to the two companies, boost their vertical integration and create a “powerful R&D engine.” Those factors together, they maintained, would enable it to participate at more points in the “technology stack” of customers.

The fine print

Under the deal terms, existing Coherent shareholders would receive consideration of US$100 per share in cash and 1.1851 shares of Lumentum stock for each Coherent share owned. When the dust settles, current Coherent shareholders will own 27% of the combined company. The transaction will be funded using a combination of cash on hand and US$2.1 billion in new debt. The price of Coherent shares popped up nearly 30% on the day of the announcement, while the value of Lumentum shares declined 11%.

Lumentum expects the acquisition to begin to contribute to earnings per share within a year after the purchase. In part, that contribution will be driven by US$150 million in cost cuts that the combined firms expect to realize within 24 months of the deal’s close.