(Bloomberg) -- When II-VI Inc. Chief Executive Officer Chuck Mattera was outbid in his effort to acquire laser manufacturer Coherent Inc. earlier this week, he chose to sit tight rather than sweetening his $6.88 billion offer. The gamble paid off.
After a back-and-forth takeover battle that lasted 10 weeks, Coherent’s board had to choose between a higher offer from Lumentum Holdings Inc. or a better fit. It opted for II-VI (pronounced “Two-Six”), which has complementary technology in lasers, optics and electronics.
“What I had was faith,” said the 64-year-old Mattera, a Rhode Island native and Yankees fan who has led the company since 2016.
Thursday’s agreement extends an M&A-fueled expansion spree for Mattera, who has hammered out 10 deals in five years. By comparison, Lumentum, which had offered $7.02 billion for Coherent, has had as many divestitures as acquisitions during that same period.
Those contrasting records may have helped sway Coherent to embrace II-VI. Mattera’s $2.6 billion takeover of another laser maker, Finisar Corp. in 2019, set a good example, according to Benchmark analyst Mark Miller.
“II-VI demonstrated with the Finisar deal that it can navigate the regulatory issues and quickly achieve a high level of synergistic savings,” Miller said.
Coherent reached its decision after the board weighed the risks and rewards of the two proposals, according to a statement. The review focused on areas including finances, potential synergies and how well the various businesses would integrate.
Not only was Coherent’s board convinced II-VI was a better match at a lower deal price, it is also paying Lumentum a $217.6 million penalty for breaking their original deal.
The choice makes sense, said Miller, who expects the combination to “enable new products, thereby accelerating growth in aerospace and defense, life sciences, and laser-additive manufacturing.”
II-VI, based in Saxonburg, Pennsylvania, takes its name from the groups of chemical elements that produce optical crystals. Its top five customers include network equipment makers Nokia Oyj, Cisco Systems Inc. and China-based Huawei Technologies Co. The other two are the U.S. government and Apple Inc., according to data compiled by Bloomberg.
Diversifying Revenue
The addition of Coherent will helps diversify II-VI’s revenue, Miller said. About 65% of II-VI’s sales come from optical gear for telecommunications and data communications companies. Afterward, this segment will be about 48% of sales.
Coherent’s roots trace back 55 years to a Palo Alto, California, laundry room, where one of its founders created a laser using a high-voltage outlet and a piece of rain gutter.
The company’s laser specialization gives II-VI new geographic reach into South Korea. Its lasers are used by Samsung Electronics Co. to process layers of polymers that give organic light-emitting diode, or OLED, screens more brilliance and sharper resolution than previous LCD screens.
“We think this is going to be a great opportunity,” Mattera said. Coherent’s lasers are the “gold standard” in OLED and will play a key role in new generations of phones, tablets and TVs, he said.
Bell Labs Roots
II-VI’s history goes back 50 years to co-founder Carl Johnson, who left Bell Labs to develop infrared and laser equipment. Through organic expansion and acquisitions, II-VI established operations in Asia. Today, about half of II-VI’s employees are in China.
Ongoing disputes between the U.S., Huawei and China are a concern to investors. About 25% of II-VI sales are “derived from selling in China, where we have a strong footprint,” Mattera said. “There’s obviously been geopolitical tension and that’s been accelerating in the last year or two. We are in compliance with the law.”
Coherent’s presence in China in smaller and in other fields, Mattera said, creating opportunities for growth.
It was late Wednesday or early Thursday when Mattera got the decision from Coherent. “I wasn’t able to go to sleep I was so excited,” he said.
Mattera, who has a doctorate in chemistry from Brown University and has been with II-VI since 2004, said he won’t be pausing to celebrate his company’s biggest deal yet.
“Our mission is to enable the world to be safer, healthier, closer and more efficient,” he said. “When you are out to change the world, the rest of that stuff can wait.”
©2021 Bloomberg L.P.
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