Signs of maturing markets

As markets mature and products become a commodity, companies either seek niche markets to keep growth (and profit) high, or consolidate operations through mergers and acquisitions (M & A).

As markets mature and products become a commodity, companies either seek niche markets to keep growth (and profit) high, or consolidate operations through mergers and acquisitions (M & A). The year 2008 definitely saw a large share of M & A activity--a strong indicator that many laser sectors may indeed be entering “commodities” territory.

In September 2008, Rofin-Sinar Technologies acquired 80% of the share capital of CO2 laser manufacturer Nanjing Eastern Laser Company (NELC; China) to improve its product offering and expand sales in China. Also in the industrial laser sector, “The successful IPO of IPG Photonics in December 2006 unleashed a wave of acquisitions seeking to accumulate fiber-laser technology and related components,” said John Harmon, senior analyst at investment banking and asset management firm Needham & Company (New York, NY). “In December 2006, Rofin-Sinar closed its fourth acquisition in the year, culminating in the purchase of Nufern, a maker of specialty optical fiber and fiber lasers; In January 2007, II-VI acquired HIGHYAG Lasertechnologie in Germany; in September, nLIGHT bought Optotools GmbH; and in October, TRUMPF GmbH acquired publicly traded SPI Lasers (the only other publicly traded pure-play fiber laser manufacturer) for $49 million.” These acquisitions signal maturity in the industrial laser sector for machining, cutting, and welding operations using lasers, although the penetration rate of lasers into some sectors such as welding still lags in comparison to conventional technologies (see www.laserfocusworld.com/articles/341585).

Even outside the industrial laser industry, the 2008 acquisitions of Novalux by Arasor (Sydney, Australia), Aculight (Bothell, WA) by Lockheed Martin (Bethesda, MD), and Excel Technology (East Setauket, NY) by GSI Group (Bedford, MA), are evidence that companies desire to “organically” expand their laser technology offering and develop system-level products that can better compete in price compared to companies that depend on external laser suppliers. For example, Arasor acquired Novalux to specifically obtain all of the components necessary to offer a complete red-green-blue (RGB) light engine for laser televisions, mobile phones, navigation systems, and other displays: the infrared lasers from Novalux and the periodically poled lithium niobate (PPLN) chip from Arasor that converts the infrared lasers to RGB sources. In the acquisition of Aculight by Lockheed Martin, Lockheed cited the ability of Aculight to strengthen its core offerings in guided munitions, airborne self-protection, and advanced sensors, and to create potential for adjacent market expansion. And in the case of Excel and GSI, Antoine Dominic, president and CEO of Excel Technology, said, “As the industry evolves, geographical reach and breadth of product offerings become paramount. By joining forces, GSI and Excel will be in a very strong position to accelerate new product introductions and global market penetration.”

“Laser companies are evolving from being ‘science projects’ to being run as businesses for the benefit of shareholders,” said Harmon. “With hundreds of laser companies chasing a fairly small market ($7 billion), consolidation of the laser industry appears inevitable. Increasing focus of large companies such as Coherent, Newport, and Rofin-Sinar on growth through acquisition and achieving the accompanying economies of scale makes it difficult for smaller companies to compete; investors are becoming less forgiving of lackluster growth and sub-par profitability, so management teams of public laser companies are under increasing pressure to pursue aggressively the benefits of consolidation.” Harmon added, “The IPO of IPG Photonics and its healthy growth rate brought back investor interest in the laser industry and highlighted the strength of the materials processing segment, which offers higher growth than scientific and government research and less cyclicality than microelectronics.” But again, caution heading into 2009 causes Harmon to conclude, “The contraction of the credit markets is likely to make acquisitions difficult to finance and laser companies are likely to focus more on cutting costs, controlling expenses, and hoarding cash.”

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