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17 March 2021 By Robert Cyran

Lumentum has fired a shot in the battle to acquire laser-maker Coherent, but may have zapped itself. Its new, souped-up offer in cash and stock values its target at $6.9 billion, slightly more than a bid by rival II-VI and an unsuccessful tilt from a third suitor, MKS Instruments. But Coherent isn’t worth this price, which explains why the remaining two bidders’ stocks have fallen. Recovering some of that market value wouldn’t be a bad consolidation prize.

Acquiring Coherent would diversify Lumentum and allow it to expand in the rapidly growing semiconductor market. It might also make Lumentum a stronger firm. That may explain why rivals MKS Instruments and II-VI entered the fray in February. MKS subsequently acknowledged Coherent’s board didn’t favor its revised bid and said it would remain disciplined, essentially taking it out of the running. Of the three bidders, it’s the one whose stock is unchanged from where it was before the bidding began.

Lumentum thinks there’s around $230 million of additional pre-tax profit to be made combining the two firms, give or take. Those are worth perhaps $1.8 billion today, applying the standard tax rate, and putting them on a multiple of 10. Yet Lumentum’s new bid has a premium of roughly $3 billion. In other words, all the immediate benefits, and then some, go to the acquirer. II-VI’s most recent offer promises $250 million of synergies, but is similarly overpaying.

Lumentum’s market capitalization has fallen by about $1.4 billion since its initial bid, while II-VI has lost about $1.6 billion. If either walked away, presumably some of this value would be recouped. Whoever loses will be spared the need to pay a high price, but also the potentially difficult integration of an overvalued company.

The winner may get a strategic edge over its rivals. And the fact that Silver Lake and Bain Capital agreed to buy convertible preferred shares in Lumentum and II-VI respectively to support their deals, implies these investors think there’s a shot an acquisition pays off. II-VI, which is the bigger firm by market value, may have the best chance of getting its way. But the market seems to be saying it could still, in financial terms, look like a loser.


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