Corning Inc. seems to have it right this time.
The optical-components supplier, which currently ranks fourth in revenue in its market, last week got another chance to climb to the top of the food chain by agreeing to pay $3.6 billion in cash for Pirelli S.p.A.'s Milan, Italy, plant.
The transaction, which comes only two months after Corning's attempt to acquire a Nortel Networks Corp. unit unraveled over terms, adds a battery of new products to the company's portfolio and strengthens an already strong relationship with both Cisco Systems Inc. and Pirelli.
"The acquisition of Pirelli's active-component technologies and products significantly adds to our capabilities in the transmission segment of the optical layer," said Roger Ackerman, Corning's chairman and chief executive.The company's move was expected within the industry, especially after it failed to clinch the Nortel deal and hinted at capacity constraints in its operations, despite spending millions in the last year to expand several manufacturing facilities.
Steven Fox, an analyst at Merrill Lynch & Co. Inc., New York, said Corning's core photonics business is sold out through at least 2001 in all product areas. The unit is expected to have sales this year of about $1 billion.
"Additionally, the company's fiber business remains sold out, and visibility here is excellent for at least the next 12 months," Fox said.
The transaction gives Corning 90% of the Pirelli plant and makes it a partner and customer of Cisco Systems Inc., which acquired 10% of the business in February and has indicated its intention to keep the stake.
Although the facility currently serves only Cisco and Pirelli, its lithium-niobate technology complements Corning's Lasertron division and will help the company attract more customers, analysts said.
The addition of the Pirelli plant, coupled with recent multimillion-dollar capital outlays, will also help alleviate some of Corning's capacity pressures, according to analysts.
"The Pirelli unit manufactures some parts that Corning doesn't, and also will contribute capacity in areas where the two overlap," Ritter said. "By helping to round out the optical portfolio, it should modestly enhance the company's long-term growth prospects."
Corning isn't the only optical-components supplier struggling to expand its facilities to meet surging demand. All the major players, including JDS Uniphase Corp., Lucent Technologies Inc., and SDL Inc., have recently beefed up their capital expenditures and made strategic acquisitions as part of plans to satisfy rising OEM demand.
Nortel said it may spin off its optical-components business to make it a more viable player in the industry. Other OEMs, including Lucent, have unveiled new outsourcing strategies that, in one scenario, involves the divestiture of in-house optical-components units.
The result of this is a heightening of consolidation activities as suppliers struggle to add both plants and new technology to their operations. While Corning has been active in this direction, it still trails market leader JDS, which has made several multibillion-dollar acquisitions in the last year. Analysts said they expect the pace of OEM divestiture of in-house optical-component operations to accelerate in the next few months.
"The Pirelli acquisition underscores the trend toward global scale, driven in part by industry capacity constraints," said Boston-based SG Cowen Securities Corp., in a research report.
Pirelli said it plans to invest the proceeds of the sale in areas such as telecommunications, energy transmission, and tires.
"Through this transaction, Pirelli will strengthen its longstanding relationship with Corning and will reinvest the proceeds to further enforce its strategic role in its core businesses," said Marco Tronchetti Provera, Pirelli's chairman and chief executive.