Optical vendor Finisar announced its agreement to acquire Red-C Optical Networks Inc. for $23.7 million in cash. The fee pays for its outstanding equity, while another $20 million in cash or stock incentive pays for hitting specific targets.
The acquisition advances Finisar’s vertical integration strategy as Red-C, an optical amplifier specialist, supports Finisar’s expansion into ROADM subsystems. Moreover, Red-C’s broad optical amplifier portfolio is well positioned to address the market’s need for transmission data rates of 100Gbps and beyond.
This is a good acquisition for Finisar because demand for ROADM subsystems is growing and Red-C’s merchant amplifier business will become more competitive and gain opportunities from Finisar’s sales and marketing strength.
Although Finisar does not have its own pump laser – one of the most expensive amplifier parts – it can use merchant pump laser suppliers and still gain from the acquisition. Furthermore, there are some good independent suppliers, should acquisition or partnership become warranted.
Finisar executes vertical integration strategy
For Finisar, the merger represents a continuation of the company's vertical integration strategy. Finisar, the OC market leader, started as a transceiver company and entered the transport market covering ROADMs, filters, and amplifiers in 2008 when it acquired Optium.
The acquisition brought Finisar wavelength selective switch (WSS)-based ROADMs and put the company squarely at the center of the transport market. By 2010, it became a ROADM market leader.
Ovum estimates that Finisar posted ROADM revenues of $179 million in 2010 and $12 4 million in 2011, winning more than a quarter of the ROADM market each year. But its ROADM profitability probably suffered because it purchased filters to accompany the WSS, which are needed to make a ROADM.