Fool.com: JDS Uniphase: Big and Getting Better (Breakfast News) January 18, 2000

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Tuesday, January 18, 2000

"Solvency is entirely a matter of temperament and not of income."
-- Logan Pearsall Smith

JDS Uniphase: Big and Getting Better

By Richard McCaffery (TMF Gibson)

Optical fiber communications equipment company JDS Uniphase (Nasdaq: JDSU) reached an agreement last night to buy rival E-Tek Dynamics (Nasdaq: ETEK) for about $15 billion in stock.

Who would've thought two companies with combined sales of $300 million last quarter would be talking about a merger worth billions of dollars?

Nevertheless, market leader JDS has offered 1.1 shares of its common stock for each share of E-Tek, a deal that values E-Tek at about $211.41 per share -- a 56% premium to its closing price of $135.88 on Friday.

By the way, it's simple to calculate the transaction premium. Just multiply the number of shares offered (1.1) by JDS's Friday closing price of $192.19 to get $211.41. Then compare it to E-Tek's closing price Friday.

JDS can certainly afford the transaction with its stock trading at nearly $190 a share. The company has split its stock twice since last summer and watched its shares rocket 1,033% over the last 52 weeks.

No question the values of these companies are sky high, and I'm completely unqualified to tell you whether they're justified. All the diligent investor can do is study the fundamentals, and on this account JDS is rock solid, except it's just turned profitable on a pro forma basis excluding merger-related charges and amortization. This is very typical for a young, fast-growing company.

The acquisition of E-Tek will help JDS round out its product offering and better meet demand in a sector growing faster than perhaps any other portion of the technology industry.

JDS' products -- devices like pump lasers, transmitters, and couplers -- are the building blocks of fiber optic systems, used to expand the carrying capacity of networks used by phone and cable companies. It's a young industry and demand is considered great. With Internet use exploding and consumers and businesses wanting data-intensive services such as real-time movies pumped over fiber into their homes, JDS is in a great position to grow.

For example, so far its products have been used mainly in long-distance fiber optic networks. It's just now starting to address metropolitan and cable networks. (Investors really interested in digging down on JDS should check out this series in the Rule Maker portfolio.)

JDS sells its products to big communications equipment companies like Nortel (NYSE: NT) and Lucent (NYSE: LU).

The company has grown rapidly through acquisitions, including its $6.1 billion merger with Uniphase last June. Not counting the E-Tek deal, JDS has made six acquisitions since September. It's all part of the company's plan to round out its product offering and to integrate the components into modules for its big customers. This saves them time and adds to the value of the services JDS provides.

The company has high margins, lots of cash, and a management that's been able to move quickly on acquisitions without damaging the company's balance sheet. The biggest risk related to JDS that I can see is its price. In a recent report, Wachovia Securities said the biggest risk for the company will be increasing its manufacturing capacity enough to meet demand.

News to Go

Communications equipment and electronics company Motorola (NYSE: MOT) reported fourth-quarter earnings (excluding special items) of $514 million, or $0.82 per share, up 223% from last year and ahead of First Call/Thomson estimates by a penny. Sales from ongoing operations increased just 8% to $8.5 billion.

Natural gas system and pipeline operator El Paso Energy (NYSE: EPG) and Energy holding company Coastal (NYSE: CGP) agreed to merge for about $16 billion in stock and assumed debt. The merger is expected to make El Paso the only company ranked in the top five in every sector of the wholesale natural gas and power arena, company officials said.

Billionaire investor Warren Buffett sold his 5.3% stake in systems integration company Bell Industries (NYSE: BI), which is moving from the New York Stock Exchange to the Nasdaq market. Bell officials said they believe Buffett sold his shares due to the fast rise of Bell's shares over the last month. Shares closed last night at $5 7/8. In related news, a subsidiary of Wesco Financial, which is 80% owned by Buffett's Berkshire Hathaway (NYSE: BRK.A), is acquiring furniture rental company Cort Business Services (NYSE: CBZ) for about $467 million in cash and debt.

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