LightCounting explains why the merger makes sense in Research Note published today.
ADTRAN and ADVA have agreed to merge, forming a company with approximately $1.2 billion in annual sales. The merger won’t reshape the optical networking industry but it does give ADVA a boost in North America and ADTRAN greater reach in Europe, and the combined product portfolios will be attractive to CSPs wanting to purchase access and aggregation gear from one vendor. We see it as a positive move for both ADVA and ADTRAN – a merger of equals, creating a more diversified supplier of access and metro optical transport solutions.
Subject to approval by German regulators, a new holding company will make an all-stock ex-change offer for 100% of ADVAs outstanding shares. Approval to proceed from the German authorities is expected in November 2021, and the deal is expected to be completed in the second or third quarter of 2022.
ADVA has been one of the smallest in the DWDM optical networking segment in terms of port shipments, which is dominated by Ciena, Huawei, Infinera, Nokia, and ZTE, and it seems unlikely the merger will change that, with a 6% gap in share between ADVA and either Nokia or Infinera.
ADVA is also among the minority of DWDM players now that continue to source coherent DWDM optics from Acacia, which was acquired by Cisco in May 2021. Despite Cisco’s good intentions of supporting all of Acacia’s customers, they will have to raise prices to keep margins high. They may have started doing this already, and this may have been a consideration in ADVA’s decision to merge. The 2020 R&D budgets of ADTRAN and ADVA were $113 million and $137 million, respectively, making it unlikely the combined company would pursue internal development of a new DSP and/or silicon for coherent optical signal processing. An ADVA spokesperson said the company is already embarked on internal development of critical components for its higher volume, but lower speed metro/edge products.
One rationale given for the merger is cross-selling ADVA gear to existing ADTRAN customers and ADTRAN gear to existing ADVA customers. ADTRAN’s product line consists of fiber access solutions, such as XGS-PON OLTs and ONUs, and ADVA specializes in DWDM optical networking for metro and DCI applications, so the product lines are very complementary. Tier 2 and Tier 3 CSPs will likely find the ability to buy access and aggregation equipment from one vendor attractive. One spokesperson referred to this target market for the new company as “Metro-core to the door”.
LightCounting sees the merger as a tacit acknowledgement by ADVA that it can’t compete effectively with the likes of Ciena and Infinera in the highest-performance submarine and long-haul coherent DWDM space. An ADVA source pointed out that the majority of ADVA’s sales have long been in metro/edge applications and the merger leverages that strength. We think this makes perfect sense.
ADTRAN’s revenue mix by geography averages about two-thirds from the U.S. and one-third international, while ADVA’s sales are about two-thirds from European customers, 27% from the Americas, with the balance from APAC. This suggests there is some opportunity to expand the customer base for both companies via the merger.
Lastly, the companies said the merger will yield approximately $52 million in pre-tax annual cost synergies within two years of closing, through supply chain efficiencies and operating model optimization. For example, ADTRAN has operations in Germany already stemming from its 2012 acquisition of Nokia Siemens Networks broadband unit, which could leverage ADVA’s German operations.
Stock traders and analysts apparently didn’t find the merger pitch very appealing and sent ADTRAN shares down 14% on the morning after the announcement. We are more optimistic – ADTRAN and ADVA have a better path forward together than separately.
We expand on our analysis and conclusions in a more detailed Research Note, now available to LightCounting clients.
LightCounting subscribers can access the full text of this research note by logging into their online accounts.