Corning assumes majority position in Pirelli optical component division

By: Neil Savage

In a move to gain entry into the submarine pump laser and lithium niobate filter markets, Corning Inc. (Corning, NY) has agreed to purchase 90% of the optical components division of Pirelli S.p.A. (Milan, Italy) for approximately $3.6 billion.

Pirelli is in the final stages of qualifying a 980-nm submarine chip and is beginning qualification of a packaged pump module. Though the devices are not quite ready for market, Gerry Fine, vice president and general manager of Corning's Photonics Technologies division, says Corning has the expertise to get them there.

Corning's Lasertron division already makes 980-nm pump lasers for terrestrial markets, and that will complement nicely Pirelli's capabilities, the company said. "We think we have capabilities in Lasertron that we can apply in Pirelli to bring submarine pump laser modules to the market more quickly," Fine told a conference call announcing the purchase.

In addition, he said, Corning can combine some of its laser capabilities with Pirelli's lithium niobate modulators, which are used in high-speed, long haul optical communications networks. "Finally, very frankly, we need the specialty fiber capacity that Pirelli has for our customers right now," Fine said.

On track to a one-stop shop
"It basically just confirms that Corning is on track and pursuing their strategy of being a one-stop shop," said John Lively, a senior analyst at RHK. "The common strategy among most of the optical component players in the industry of having breadth in your product portfolio does have pretty recognized benefits." Having a wide array of products puts a company in a good position when negotiating sales with customers, Lively said. And having a range of technology allows it to offer solutions to various customer needs.

Like many other companies in the optical networking business, Corning has been buying companies that add to its total networking package. The company acquired Lasertron when it purchased Oak Industries (Waltham, MA) for $1.8 billion last November (see Corning Adds Lasertron's Optoelectronics Capabilities by Buying Oak Industries). Last December, Corning purchased the optical cable and hardware operations of Siemens AG for $1.4 billion (see Corning to Acquire Siemens Optical Cabling Business, Interest in Siecor). And in February it bought NetOptix Corp. (Sturbridge, MA), which made coatings and filters for DWDM, for $2.15 billion (see Samsung, Corning Join to Mass Produce Optical Products; Corning Takes Helm of NetOptix). Earlier this year the company attempted, unsuccessfully, to buy Nortel's optical components business.

"We want to be the world's leading optical layer company," said Corning president and chief operating officer John Loose. The optical layer is where optical fiber and photonic equipment join with optical cable and hardware.

Financial details
Under terms of the acquisition, Corning will pay approximately $3.4 billion, with another $180 million contingent on the achievement of certain business milestones. The remaining 10% of the division is held by Cisco Systems, which says it will retain ownership, according to Loose. The division had sold products only to Pirelli and Cisco, but Corning officials said they intend to expand that customer base while working hard at keeping Cisco a major customer.

The division "is not profitable today in 2000, but will be profitable next year," said James Flaws, Corning's chief financial officer. Flaws said the Pirelli division, which will add to Corning's bottom line by 2001, should have more than $80 million in revenues by 2001 with the potential to reach more than $1 billion by 2004.

Corning predicts that the modulator market will have a compound annual growth rate of greater than 80%, growing to total market revenues of $2 billion in 2005. The market for submarine pump lasers should have a CAGR of 60%, reaching $2.3 billion in 2005, Loose said.

The division's operations will remain in Italy, and the number of employees should grow from 310 currently to 440 by year's end.

Fine said Corning will be selling 10-Gigabit capable lithium niobate modulators this year. "We think the technology is 40-Gig compatible. However, it is going to require some modification to get it out there," he noted. He said the company's research laboratory in Corning, as well as the lab it bought last year from British Telecom, will work on extending the modulators' capabilities.

He also predicted potential future advantages using Pirelli's fiber Bragg gratings in tunable dispersion compensators for use in ultra-high-data-rate systems. Where Corning is lacking technologies, Fine said, more acquisitions are likely.

Lively said it probably made sense to Pirelli to take profits from the sale and put them back into its core business. "They probably didn't see themselves as having critical mass to become a big player [in optical networking] like Corning or Nortel or JDS [Uniphase]," he said.

About the author…
Neil Savage is a freelance technology