Finisar, Optium to merge; investors fear BCE repricing; Icahn battles Yahoo; Take-Two offer expires

By Stephanie N. Rotondo

Portland, Ore., May 16 - Finisar Corp. and Optium Corp. announced Friday their intent to combine the two companies.

The all-stock merger - valued at over $200 million - would position the newly formed optical components manufacturer to be one of the largest in the communications industry. And, as the two companies have differing products and customers, the scope of their involvement in the sector would largely increase.

According to one source, Finisar was looking to move into the direction of Optium's business previously. A merger would not only accomplish that, but could save Finisar a lot of money.

Meanwhile, concerns remain about whether BCE Inc.'s LBO deal will be repriced. Since the repricing of the Clear Channel Communications deal, investor uncertainty has increased - though one analyst believes the two deals to be very different.

Now that Carl Icahn has opened war on Yahoo Inc.'s board of directors, the market is speculating as to whether he can get Microsoft Corp. to renew its offer for the internet company. In the past, Icahn has been able to bring former adversaries together, such as in the BEA-Oracle deal. Many market players believe he can do it again.

One analyst compared the situation between Electronic Arts Inc. and Take-Two Interactive to that of Yahoo and Microsoft, stating that it could be nothing short of ego that is hindering the deal. As Electronic Arts' bid for the software company expired Friday, it was widely believed that the offer would be extended for the second time.

Finisar, Optium higher on deal

Finisar and Optium announced their intent to merge the two companies on Friday through an all-stock merger valued at $212 million.

Investors reacted well to the news, and shares of Finisar (Nasdaq: FNSR) gained 18 cents, or 13.54%, to $1.51, while Optium's stock closed higher by 93 cents, or 11.43%, to $9.07.

"It makes sense for both companies, [as well as] shareholders and the industry," one analyst said of the announcement. The industry, he added, "urgently needs consolidation."

As an added bonus, Finisar and Optium reside in different corners of the sector, he said.

"There is little overlap between the products and customers between the two companies," he said. "Optium makes products in the direction Finisar was moving," which could save the company money in research and development.

The combining of the two firms will result in one of the largest suppliers of optical components, modules and subsystems for the communications arena. Separately, both companies said they expect to post record revenues for their most recent quarters. In a press release announcing the deal, the companies said they expected to report annualized revenue of approximately $660 million.

"This combination leverages the unique strengths of both companies," said Eitan Gertel, chairman and chief executive officer of Optium, in a news release.

"In combining with Finisar, we will unleash a powerful opportunity to create added shareholder value through breadth of product, enhanced customer support and manufacturing flexibility. With little product overlap, the proposed combination will complement both companies by providing more choice for customers, best-in-class technologies, focused technology innovation and cost efficiencies to meet our customers' requirements. Customers and employees will be treated with the utmost care in combining our two companies."

BCE worries

With the recent settlement and resultant repricing in Clear Channel Communications' LBO, there is some fear in the market that BCE's deal could be renegotiated.

News reports speculated that the company's debentureholder lawsuit in the Quebec Court of Appeals could end with a ruling as early as Friday - though, at press time, there was no word. But with economic conditions being what they are, some have said that the price of litigation might be cheaper than the price of funding the deal.

"The concerns all stem from the Clear Channel repricing," one analyst said. But the two companies have very different fundamentals, he added.

While Clear Channel was heavily dependant on advertising revenues - which have slid in the wake of a looming recession - BCE "has good operational performance and its debt leverage is much lower," the analyst said.

"I don't see grounds for repricing," he added.

Still, he conceded that the market at large did not necessarily agree with his viewpoint.

"There is definitely uncertainty," he said. "Whether it is repriced or delayed, or whether the bondholder suit goes against [shareholders]."

Still, "[the stock] has tightened up a great deal since the CCU deal went through."

Shares of BCE closed down 25 cents, or 0.64%, to $38.77.

Weighing Yahoo's chances

Yahoo's management has defended itself against billionaire investor Carl Icahn's rebukes, but they may be fighting a losing battle.

Yahoo responded to Icahn's open letter to its board of directors by claiming they were open to any proposals from interested parties - and reminding him that there is currently no offer from Microsoft to consider.

But one of Icahn's nominees to the board, John Chapple, has said he will not join the group unless he is assured that Microsoft will renew its offer. Consequently, some believe that his nomination indicates that Microsoft would be willing to do so.

Icahn will not be alone in his fight. Many shareholders have already aligned with the activist investor. Also, two Detroit-based pension funds suing the internet company in Delaware's Chancery Court for breach of fiduciary duty regarding the Microsoft offer have added the company's co-founder, David Filo, as a defendant. The funds also want to make the complaint public, as Yahoo previously redacted it.

But regardless of which side has more players, the entire battle could be useless if Microsoft refuses to come back to the table.

"I think Yahoo is a lay up for Icahn," said one market source. "They will have the entire shareholder base voting with them.

"There will be a new deal with Microsoft," he opined. "$34 within three months, I bet."

Other market participants have said that without a deal, Yahoo's stock would be valued at $23.

Shares of Yahoo (Nasdaq: YHOO) were unchanged at $27.75, while Microsoft's (Nasdaq: MSFT) equity slipped 46 cents, or 1.51%, to $29.99.

Electronic Arts' offer expires

As Electronic Arts' offer for Take-Two Interactive was set to expire Friday at noon, it was widely believed in the marketplace that the proposal would be extended for a second time.

"They have extended it once already," said one analyst. "I expect they will again."

Take-Two has dragged its feet on the deal, claiming it was worth more than the original offer. Electronic Arts, however, has seemed unwilling to budge.

"The offer of $25.74 is pretty ridiculous at this point," the analyst said. Shares of Take-Two (Nasdaq: TTWO) closed down 18 cents, or 0.66%, to $27.15 on Friday.

"To get this deal done, EA will have to offer something in the 30s," the analyst opined. However, "if there is a competitive bid, they will have to go higher."

Take-Two has said that Electronic Arts is not the only one interested in acquiring the gaming software company.

"There is a realistic opportunity that you could have another interested party," the analyst said. But he stated that he would not rule out Activision.

Activision already has gaming franchises such as Guitar Hero, Call of Duty and DOOM under its belt. The addition of Take-Two's games could make Activision the one to beat.

"If they could add Grand Theft Auto to their portfolio of games, they could be an absolute monster," the analyst said. "I don't think EA is in a position to let that happen."

And while the analyst called the merging of the two companies "pretty much a no-brainer," he added that ego could play a role in breaking down negotiations - likening the situation to the Yahoo-Microsoft saga.

"You look at it and ask 'Why couldn't you guys just decide on the one or two dollars so you can get the deal done?'" he said.

Still, the analyst was optimistic - though cautiously so.

"I think [the deal] gets done, but it could easily just fall apart," he said. "It's more than a coin flip that it gets done."

Share of Electronic Arts (Nasdaq: ERTS) fell $1.92, or 3.73%, to $49.60.

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