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  • Newport Buys Spectra-Physics, Promotes Product Line Integration

Photonics Spectra
Jul 2004
Paula M. Powell

Does product line integration offer a competitive advantage in the ever-changing laser and optics market? Newport Corp. in Irvine, Calif., is betting that it does with its acquisition of Spectra-Physics. In June, the company signed a definitive agreement with Thermo Electron of Waltham, Mass., to purchase essentially all of its optical technologies segment business for $300 million, the exception being a specialized digital-camera segment.

According to Robert Deuster, Newport chairman and CEO, the agreement encompasses all other product lines placed under the Spectra-Physics umbrella during Thermo Electron's brand-integration effort. The catalog operations of the Spectra-Physics Photonics Div., including the company's spectrometer and monochromator, light source, optical filter, x-ray crystal and diffraction grating product lines, will be integrated into Newport's Industrial and Scientific Technology Div. 

Newport Buys Spectra-Physics, Promotes Product Line Integration The Spectra-Physics Laser Div. will go back to its roots, in a sense, and focus primarily on laser technology. Robert J. Phillippy, in the newly created position of Newport president and chief operating officer, will have direct responsibility for all business units and will serve as the laser division's interim head.

The purchase agreement calls for $200 million in cash, $50 million in Newport common stock and a $50 million promissory note to change hands, with the sale complete sometime in July, subject to regulatory approval. Newport has one thing in common with some of the other survivors of the telecom bubble years -- it was able to support this acquisition primarily with cash on hand. During 2001 and 2002, prior to consolidating its fiber optics group into other operations, the firm raised some $338 million in a secondary stock offering.

All parties entered the agreement with decent financial status. Newport's year-end 2003 sales were $134.8 million. Its first-quarter 2004 sales of $42.4 million were roughly 27 percent higher than for the same period last year. According to Spectra-Physics's former chief executive Guy Broadbent, who is remaining with Thermo Electron, the optical technologies segment accounted for only about 10 percent of total revenue last year; however, this translates to about $200 million for the year. It also showed signs of market improvement with first-quarter revenues of roughly $58 million, up 16 percent over first-quarter 2003.

Deuster expects the combined company to account for some $400 million in annualized sales. It will have more than 2000 employees and 15 manufacturing plants in five countries. "This acquisition expands our business substantially," Deuster said. "It's one of those ideal combinations ... we've always developed technology that supported lasers in applications, but we never made lasers. The market overlap between our two companies is thus tremendous at roughly 80 percent. The customer overlap is about 60 percent; the product overlap is very small. This will enable Newport to become a single source of photonic solutions to our customers in each target market."

Because of the primarily complementary nature of the product lines, Deuster and colleagues do not anticipate any major restructuring of facilities or reductions in staff for the near term.

Taken at face value, the merger appears to be a win-win situation for both Newport and Thermo Electron, which Broadbent reports is looking to focus more on its position as an analytical instrumentation provider. "The Spectra-Physics product line focused on lasers and components, some of which go into the scientific instrumentation," Broadbent said, "but there was a different customer set within a different part of the value chain. We felt there might be a better strategic alignment for Spectra with someone more focused in the optoelectronics industry."

So does the change of ownership for Spectra-Physics significantly alter the competitive face of the laser and optics industry? Even with expected synergies related to product lines, distribution and more, the answer to this basic question will depend on how well Newport can market the benefits of product line and technology integration to the new and
existing customers of the merged companies.

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